Friday, July 27, 2012

The New Normal? Part Deux

Following on my earlier post, another way of thinking about normal is not just the conditions on the supply side, but on the demand side. The last big drought we had, in 1988, caused a 25% drop in supply, but barely a blip in corn prices. 

Today the prospects of a drop as big as 1988 have already sent prices about 50% higher since June. The difference of course is the markets are much more sensitive now to supply shocks. I'm not an economist (my standard excuse) but from what I can tell it has a lot to do with low stocks, which in turn has a lot to do with ethanol and other inelastic sources of demand. So the question about a new normal is also partly about whether the market situation is the new normal. I'll leave it to the real economists to answer that one.

1 comment:

  1. We had huge stocks of government owned grain reserves going into the 1988 drought. Low stocks and inelastic ethanol demand this time...explosive.

    Scott Irwin