15. In late 2006 and early 2007, orange crops in Florida were smaller than expec

Question

15. In late 2006 and early 2007, orange crops in Florida were smaller than expected, and the crop in California was put in a deep freeze by an Arctic cold front. As a result, the production of oranges was severely reduced. In addition, in early 2007, President George W. Bush called for the United States to reduce its gasoline consumption by 20% in the next decade. He proposed an increase in ethanol produced from corn and the stalks and leaves from corn and other grasses. What is the likely impact of these two events on food prices in the United States?

In late 2006 and early 2007, orange crops in Florida were smaller than expected, and the crop in California was put in a deep freeze by an Arctic cold front. As a result, the production of oranges was severely reduced. In addition, in early 2007, President George W. Bush called for the United States to reduce its gasoline consumption by 20% in the next decade. He proposed an increase in ethanol produced from corn and the stalks and leaves from corn and other grasses. What is the likely impact of these two events on food prices in the United States?

Explanation / Answer

Orange crops were decimated, which means there were less oranges available for consumption. Less oranges available means the supply curve "contracts". Less quantity available means each item sells for a higher price, thus oranges become more expensive, which impacts on the price of dependent products likeorange juice.

Greater quantities of corn and grasses mean demand will increase. If the demand were instantaneous then price would increase to contract demand and ensure demand and supply remain in equilibrium. However, it takes time for grasses to grow, so what would most likely happen is a temporary increase in prices, until new grass production becomes available, increasing supply, which should reduce the price again but have increased supplies to the market to take advantage of the situation.

In both cases the price will rise. In both cases it will be fairly temporary - next year's orange crop should be fine, and supply of grasses would increase.

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