I have been fielding comments on post previous posts about basic economic scenarios. One of the most frustrating of these strange theories for me has been the agrarian absurdity that low prices force higher production:
But computer chips and crops work differently. Say you're an Iowa corn farmer and the price of corn futures drops after you've planted the spring crop. Unlike Intel, you can't slash production any time soon; you have to wait until the next season's planting.
Worse still, when the time comes to put the next season's crops into the field, you're faced with a harsh fact. If you decide to plant less corn, there's no guarantee that the corn price will rise. Why? Because unlike Intel -- which essentially shares the chip market with AMD -- you have thousands of competitors. Unless you can figure a way to organize a significant portion of them to join you in cutting production, you're not going to succeed in pushing prices up.
Since no mechanism exists to coordinate farmers in their planting decisions, they tend to respond to price drops in a way that would be alien to an Intel exec: they plant more corn. The calculation: If they're going to hold their income steady while prices fall, they'll have to bring more product onto the market. But since thousands of other farmers are making the same decision, the market just gets flooded with corn and prices fall further. [More unadulterated drivel]
OK - it all sounds so down-to-earth reasonable, doesn't it? Followed to its extreme, if nobody offered to pay for corn, we farmers would cover the planet with it. What is wrong with this logic chain?
First, let's look at the flip side. Prices are rising for corn and farmers are planting more of it. Ask seed or fertilizer salesman. It seems if you can make more money with a crop you choose to do so. Gosh - if only I had thought of this earlier! I have heard no hints of "holding back" to keep income level. So I think it is safe to say if prices for corn go up, farmers plant more corn.
But wait, according to the above, when prices go down, farmers plant more corn. So it would seem no matter what prices do we plant more corn. Obviously not.
One of the key ideas in the agrarian economic explanation is we farmers can increase our production at any time by doing things like plowing up pastures, polluting, and applying more chemicals - in short, fair prices keep us from doing bad things that will raise production. And our only goal in life is to keep our income steady.
Oddly my experience has seen no economic return to erosion, in fact it is a really bad production idea. Similarly when corn was $1.80 I was skimping on fertilizer, cutting spray rates, and lowering population to cut costs. As prices drop, we have to lower costs to make money, we can't just command the field to have higher yields. Now with $4 corn, I'm going to try some fungicide I never could quite afford. According to the salesman, this will increase my yields and profits. (Yeah- well, we see about that - but only with high prices would this idea be feasible)
If I can increase my income at any time as suggested by agrarians by magically increasing my yields, or planting some apparently unused acres, why don't I? Is the income I am making right now "just right"? "Oh, no thanks, I've got all the money I can handle, thanks."
Producers try for the highest yield (income) they can afford every year, not just in down years.
As corn prices drop, producers switch to other crops to see if they will make more money. This cuts supply, as well. Check out soybean acreage this year, for example.
Finally, we really don't have that many idle acres around that we can bring into production cheaply, as agrarians would suggest.
The supply curve slopes up, not down. And the proof is the explosion of corn acres as $4 corn continues.
The other danger of such pseudo-economics is the perpetuation of the idea producers are helpless to control their business. This Is debilitating dogma.
On the other hand, believers in such clap-trap are not competitors I have to worry about.