Name____________________________________
The interdependence of markets: wheat, corn, oil, exchange rates, and interest rates.
You are the wheat specialist for the US Department of Agriculture with the job of predicting the wheat crop each season and the prices paid for American wheat.
To grow wheat requires:
1. Good fertile land that can be used for growing most types of grains such as wheat, corn, barley and soy.
2. An adequate supply of water with good growing temperatures and sun light
3. Fertilizers and agricultural chemicals.
4. Tractors, harvesters, and trucks and fuel (gasoline or diesel) to operate them.
Thus the cost of growing grain depends on the rent paid for land as well as the cost of all the other inputs including seeds. The rent paid for land for growing wheat depends directly on the prices of other grains and crops that use the same type of land.
The primary use of wheat is for food – bread, pasta, bakery goods, cereal, pizza, etc. In contrast to many other grain products it is not used for cattle feed, nor as a source of vegetable oils, sweeteners and now more recently bio-fuels. Each year farmers have to decide what to grow on their land because they can usually choose between wheat or feed grains and products: soy beans, corn, barley, oats and even hay. Their decisions depend heavily on what you predict in your monthly analysis of future wheat prices and output per acre.
The domestic demand for wheat is relatively stable. The big fluctuations occur from changes in the foreign buyers demand for US wheat. That demand depends primarily on the wheat crops abroad (Australia, Ukraine, Canada, Latin America) and on the value of the dollar. When the dollar falls, US wheat becomes cheaper in foreign currencies and foreign buyer buy more and when the dollar rises, it becomes more expensive.
In your newsletter, you use a very simple way to analyze the diverse factors affecting wheat.
1. A simple supply and demand chart showing how a supply curve or a demand curve shifts.
2. An arrow indicator that prices and quantities will rise and fall. P__ˉ_or _-__ and Q __ˉ_or _-__
3. A short explanation why this even affects the wheat market chose from below.
Below are 6 developments that you foresee for the coming growing season. You have to indicate on the side which chart from the above four you will use, whether the price will go up or down, whether the total quantity will go up or down, and lastly. Select which of the short explanations below the event best explains the impact on the wheat market.
On the following page, there are 8 events that directly or indirectly affect the wheat market.
1. Find the right reason from the list below the 8 events, describing how and why the price and quantity were affect and enter it in the column with the heading “Reason”
2. Identify which of the charts best describes the impact on the market.
3. Last, put upward or downward pointing arrows for the final effect on the market. You will notice that only one curve moves in any of these examples.
Name___________________________________
Chart P & Q Reason The 8 events the may affect the wheat market.:
____ P__Q__ ____ 1. Congress reversed the law that all gasoline must contain 15% ethanol by 2010. Ethanol was primarily produced from corn which grows on the same land as wheat. Now it can be produced from algae.
____ P__Q__ ____ 2. Foreign countries increase their purchases of US wheat because of the lower price compared to their own markets in Euros.
____ P__Q__ ____ 3. Continued global warming, it seems, prolongs the drought (absence of rainfall) in the major grain growing areas of the US and reduces the wheat crop by 40%
____ P__Q__ ____ 4. Confronting rapidly rising Medicare costs from diabetes and heart disease from obesity, the US Congress orders the US Dept of Agriculture to recommend a diet that greatly reduces the recommended consumption of sweeteners, meat and dairy products. These industries had been major consumers of feed grain and corn.
____ P__Q__ ____ 5.The legislated demand for ethanol made from corn is dropped and all subsidies for corn-based ethanol are ended.This is the result of a new technology to use algae to produce ethanol rather than corn ends the demand for corn to be used in making ethanol.
____ P__Q__ ____ 6. Australia and other countries finally had good wheat crops in 2010 and resume exports.
____ P__Q__ ____ 7. China and the rest of the world come out of the world recession and the demand of wheat based products continues to rise, greatly raising imports of wheat.
____ P__Q__ _____ 8. Gluten, present in wheat, rye and barley, is found to could celiac disease, schizophrenia, autism and Type 1 diabeties.
____ P__Q__ _____ 8. The cost of crude oil continues to rise on world markets.
Possible Reasons: 5
1. A rapid improvement in the American economy forces the Fed to raise interest rates which attracts investment in US securities and drives up the value of the dollar
2. US domestic demand for US wheat picks up as prices rise in the US and on foreign markets.
3. The higher price of oil greatly increases the cost of growing wheat and all grains.
4. US engineers develops a new ethanol process that with minor changes in existing ethanol producing
factories can produce great quantities of ethanol at a much lower cost by harvesting the algae that currently pollutes our lakes than by corn so that corn production falls. Rent on grain-growing land falls.
4. The sudden shift in dietary patterns, despite heavy marketing buy meat and dairy producers, greatly reduces the demand for grain to be used for feed for dairy and beef cattle.
5. The US dollar weakens because of lower interest rates and the large deficit caused by higher crude oil prices.
6. A drought hits the major wheat growing regions in the United States
8. The Fed hold interest rates low as unemployment continues so as to maintain the slow recovery of the economy in 2020. (Euros now buy more).
9. US Dept of Agriculture recommends a diet that greatly reduces the recommended consumption of white wheat flour and gluten based products.