10 July 2007
Supply and Demand
The recent wet weather in the UK has started to fuel expectation of the possibility of damage to various crops. In South Yorkshire, farmers who have planted potatoes found their fields under water for several days and feared the worst for their crops. Farmers cannot get insurance for damaged crops so most just have to accept the losses that they might suffer. It is not just the fact that many plants, despite needing water, do not like to be stood in water but also the atmospheric conditions that prevail that also encourage other problems such as fungal diseases.
Potatoes are particularly susceptible to a devastating fungal disease called blight. Farmers across the country are now looking carefully at the effect that the wet weather so far this summer will have on their yields.
The trade organisation for potato growers, The British Potato Council (BPC), has suggested that it is too early to tell just how much effect the weather will have on the supply of potatoes. Potatoes are used for a wide variety of food products; they are used, not only for chips, but also in ready made meals such as shepherd's and fisherman's pies, hot pots, crisps (potato chips if you live in the US), dishes such as Bombay Potato as well as the usual uses that millions of households put them to as part of our everyday food consumption.
The eventual effect on the price of potatoes will depend on the demand and supply for potatoes. What will be important will be the relative changes in both demand and supply. The current estimates for a tonne of potatoes is around £150 whereas this time last year the price was around £193 according to the BPC. This suggests that either supply is higher than last year or demand is lower or a combination of the two.
It is this combination that is interesting. The supply of potatoes depends not only on the amount of acreage put aside for potatoes but also the yield - the amount of potatoes extracted out of the ground per acre. The planted area, according to the BPC is 1% higher than last year. This might suggest that farmers had looked at potato prices and decided that they were a better crop to grow than anything else at that time because the financial rewards were greater. However, the wet weather might mean that yields might not be as high as last year; the wet weather might not completely destroy a crop but it can significantly affect the amount of potatoes that reach maturity and which can be used.
Then we need to consider demand. If demand has fallen, for example, how much has it fallen by? What are the factors that might have affected the demand for potatoes? Is there anything that the BPC can do to reverse that fall in demand or encourage producers and consumers to buy more potatoes? If demand falls by (say) 2% but supply increases by 5% then prices might still fall even though demand has risen.
Early supplies of potatoes have been good - yields, according to the BPC, have been higher than in previous years and early season new potatoes have seen yields 9% higher than this time last year. If the BPC are right, then very few potato crops this year will escape some blight damage and as harvests are completed in the coming two months, we might start to see yields dropping. Supply might therefore be affected badly but this does not mean that prices will automatically rise. We have to consider what is happening to demand as well!
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Explain the meaning and purpose of 'insurance' in business. (4 marks)
Why do you think it is difficult for a farmer to get insurance against damage to crops? (6 marks)
Consider the relevance of the cobweb theorem to farmers growing a crop like potatoes. (8 marks)
Explain how, despite a significant rise in the demand for potatoes, the price of potatoes could fall? (10 marks)
To what extent do you think the weather plays a major part in determining the supply for agricultural produce such as potatoes? (12 marks)