Question

l have lived in Nebraska for 10 years and have been a big fan of farm radio all that time. However, I have come to the conclusion that people in the Nebraska media are just plain wonky ( you know what I mean,"nuts").The media has been talking non-stop about the recent decrease in crop prices and how this will hurt farm incomes. If you stop to think about it, this reporting does not make sense. If I remember my economics correctly, when prices are low people buy more. If people are buying more, then farmers are selling more and their incomes should be increasing. I mean really, when the crop price falls and the farmer is selling more bushels (e.g. 1.000 versus 500 bushels), then it only stands to reason that they would make more money (e.g., income).

On the other hand, I also remember the media coverage last year when prices were high and all they could talk about was the "high" level of farm incomes, I just don't get it. Again, economics tells us that people buy less when prices are high. So it stands to reason that if people buying less then farmers are selling less, and if they sell less, they earn less income. So why would farm incomes be higher if they are selling less? Am I right that the media is "wonky or is there a logical explanation for what is being reported? Please explain this to me.

Signed, Ann

Please answers these two questions:

Comments reader's arguments, agree or disagree and why?

Support your arguments with economic theories?

Answer 1

I disagree, Nebraska media is not "Wonky". If the prices of farm product are low the farmer income nosedive. And if the prices of farm product are high then the farmers make a healthy income.

This is mainly because the demand for the farm product is "inelastic" i.e. it doesn't change with the price of the product.

For example, if Ann can eat 5 loafs of bread in a day, she will eat those 5 loafs no matter what the price of those loafs is. If the price of a loaf of bread was $10 and it increased to $20 then the farm income will increase because they are now getting more for each loaf of bread but if the price of loaf decreased to $5 Ann will still be eating 5 loafs of bread she can't increase her consumption beyond a point. And the farmers producing those loafs of bread will face loss.

The same thing goes for the other consumers. They have a fixed demand for the farm product they can't increase those demand beyond a point and they can't decrease that demand too. So when the prices of farm produce fell people have to spend less amount of their income to buy the same amount of good and the farmers earn less. When the price of those farm goods increases people still buy the same amount of good but by spending more money thereby increasing farm income.