Thursday, February 3, 2011

Wheat Prices

The New York Times has a good article on the effect that the Russian export ban had on wheat prices during 2010. From the article, Russia had high temperatures, drought and fires that significantly reduced their grain crops. Russian Prime Minister Putin then enacted a grain export ban (including wheat), in order to stabilize grain prices within Russia.

Notice that an export ban acts similarly to a reduction in the world supply of wheat (i.e. shifts the supply curve of wheat to the left), and assuming no change in the demand for wheat yields an increase in the price using the supply and demand model. Guess what? Wheat prices increased exactly as the model would suggest.

Now the big winners from this type of export ban would be non-Russian farmers (many were US farmers) in that they are able to sell wheat for higher market prices than would be the case without the Russian wheat export ban.

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