Corn Prices

This week, I decided to look at something a little different than the usual. I found a paper by Bowen Chen and Nelson Villoria that presents an empirical study on the price of corn in a variety of net importing countries and relates the price to the climate instability. The way in which the authors approached finding the effect that weather and climate has affected these prices is through a regression model that takes into account a variety of different variables from both the importing and exporting country. The authors came to a variety of different conclusions. The first conclusions being corn prices are more stable in countries where imports make up a larger part of domestic consumption. I found this to be very interesting because it is basically saying that that when importing prices are more stable compared to producing yourself. I suppose this could be because there are more countries to import it from and because there are different options, it is easier to get ahold of and have a set price. The second being the authors expect that climate change will cause corn prices to rise by approximately 10% by midcentury because of the growing instability in climate in corn producing countries.

              To relate this back to our class, we can think about this price increase of 10% due to climate change because of corn supply shocks. When thinking about this in terms of a short run model, you can see exactly why this price rises by so much. Assuming that the climate causes a decreased yield, we get a supply shock. When not open to trade, a supply shock will shift the supply to the left, thus raising the price of the corn. America is a net exporter of corn, so because we are trading it we know that once opened to trade, the price will rise because we still have the same amount and demand will increase. So, with the already increased price from opening to trade and then a 10% increase due to climate change and disasters, the government may look for a way to make it more affordable in the United States because corn is a base product in many foods. One way that the government could ensure that this food is still able to be produced and at a consistent price is through a quota on the amount exported. This quota would limit the amount exported leading to a more stable price in the US because there would be more to go around and not as much of a demand. As for the global market, this quota may drive the price of international corn up further though. This indeed may hurt the overall welfare of the world; however, it would benefit the US welfare.