Question

Secondly, Australia's Agricultural Resources Economics and Technology Bureau (Abares) latest report said that in 2018/19 (2018.10-2019.09), Australian wheat production is expected to increase by 3% to 21.9 million tons per year; however, due to the recent dry weather, farmers' willingness to plant decline. The impact of the latest estimate is about 1.8 million tons lower than the March production forecast. Australia has experienced the third drought in May, and the Bureau of Meteorology estimates that Australia's rainfall in June will also be below average. Inventories and disappearance rates in major exporting countries are expected to fall to their lowest level in five years due to falling production and relatively unchanged exports. The decline in the ratio of stocks to disappearances indicates a decline in the supply of exports to the global market. This increases the risk and potential for world price volatility that led to the 2019-20 harvest.
Among the above changes, what is the possible impact on the macroeconomy? and how to draw a supply and demand curve.

Answer 1

SCENARIO 1- EXPECTATION

Initially , Australia's Agricultural Resources Economics and Technology Bureau (Abares) latest report said that in 2018/19 , Australian wheat production is expected to increase by 3% to 21.9 million tons per year.

The below graph shows that, demand and supply curves of wheat production, meeting at equilibrium point E .This expected increase in supply will cause the supply curve to shift rightwards from S to S1 meeting at new equilibrium point E 1. This will result to fall in price level(P to P1 ) increased quantity of wheat ( OQ to OQ 1).

SCENARIO 2- REALITY

However, due to the recent dry weather, farmers' willingness to plant decline. The impact of the latest estimate is about 1.8 million tons lower than the March production forecast. Australia has experienced the third drought in May, and the Bureau of Meteorology estimates that Australia's rainfall in June will also be below average. Inventories and disappearance rates in major exporting countries are expected to fall to their lowest level in five years due to falling production and relatively unchanged exports. The decline in the ratio of stocks to disappearances indicates a decline in the supply of exports to the global market.

The above scenario, has drastically led to a fall in Supply of wheat ( due to plantation decline, drought , fall in inventories.) . This would result in fall in Supply curve, i.e ) the supply curve shall move leftwards from S to S2, and meets at a new equilibrium point E 2. At this point, the Price for wheat has risen from P to P2 and the quantity of wheat has fallen from OQ to OQ2. Refer below graph.