Sunday, July 22, 2007

Random Thought

As I was biking the past few weekends past the fields and cow pastures I had an interesting thought and would like some input from the readers. Tell me if you think this makes sense or if you think I am on crack.

I imagine that the spike in gas prices helps our local farmers in almost all facets, with one exception - purchasing gas for their own equipment. It seems only logical to me that produce, milk, meat and anything else that has to get shipped in from other areas of the country would only cost more to offer to this market, making the local production more valuable. Leave out for now the subsidies and all the other breaks that farmers get - I am just looking at the market for goods. Usually markets respond rather quickly unless there is a rather large quality issue.


Jonathan said...

Interesting idea. It makes sense. Maybe it's testable.

Anonymous said...

I would be interested on the fluidity of who the actual purchasers of the output from the farmers. If many are selling to a large distributor or collection plant, who in turn sells to a company like Kraft, I'm not sure how much of market would be affected by the gasoline cost. It may help the farmer's market type farmer if all things are equal, it changes people's buying patterns.

Dan from Madison said...

The more I was thinking about this, the more I think it helps domestic farmers overall. The majority of our population lives outside the midwest, where we have lots of fields, cows and other things that are needed in population centers like the coasts. Of course with spiking fuel prices it costs more to get that pork from Iowa or wherever to these markets, and I would think this hurts farmers - unless there is a somewhat static supply and demand curve, in which case they can simply raise their prices (or the market will).

That said, I would think we would be more inclined pricewise to purchase goods locally, vs. milk and cheese from California for the same reasons.

What stuck out in my head the largest is that ag products from other countries will be taking a severe beating from fuel prices.

Perhaps the scale of the question is too large.

Annie said...

It completely affects gas prices. In my little corner of the world there has been town meeting after town meeting of the area farmers concerning who to sell to. The gas companies are offering more for corn up front than any one else, but then once they have it they are setting it in storage until it molds and is useless. This way, the ethanol companies (who by far can't match the prices offered by the gas companies) don't have access to it. No hybrid fuel manufacturing going on there.
The circle then goes on to gas being in demand (thus higher priced)in production and transportation of agri-products (where it all started to begin with). Lather, rinse, repeat. YMMV

James R. Rummel said...

Tell me if you think this makes sense or if you think I am on crack.

You are on crack.

Rising fuel prices causes inflation. No farm above a small family plot is self sufficient, and they do not completely rely on supplies from close by local sources.

So everything they use to stay in business, from livestock feed to the nails which hold the barn together, go up in price when the gas prices jump. The only way for your model to make sense is if the cost of production stays static while the prices farmers can demand for their products rise.

Having said that, no economic variable effects every business in exactly the same way. Some farms will be able to enjoy a bit more profit, while others will see their profits fall. But it isn't going to be very significant.

There very well could be a farm business that can enjoy increased profits by using the gas price increase to raise their prices, while at the same time seeing little rise in production costs. Say, one of those vegetable stands you see out by the roadside every so often.


Dan from Madison said...

Thanks James. Now that I have put the crack pipe down for a second, don't you think that competing international goods will take it on the chin with the rising fuel prices?