Friday, October 12, 2007

Hay - Why Have Prices Doubled?

According to a number of stories in the media including this one from MSNBC.com, hay prices have just about doubled this year. Why?

I am sure that the astute readers of this blog and anyone else who has read a managerial economics textbook (perhaps, like this one) will consider possible shifts in supply and demand as factors explaining this change. Drought-like weather conditions have certainly contributed to a contraction in supply partially explaining the price increase.

But, a more subtle factor is contributing as well. Changes in the price of substitutes can also impact demand for a product. And, prices for corn, one of the primary substitutes for hay, have shot up this year thanks to the increased demand for ethanol. As more farmers shift away from high-priced corn to feed their animals, demand for hay goes up and prices increase.

2 comments:

  1. In addition to an increase in a substitute product and the recent drought, some farmers have even switched from growing hay to corn because corn is even more profitable. This reduces the supply of hay even further.

    Are there futures contracts available for hay, like there are for houses?

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  2. There is much less substitutability between corn and hay than you think, as they have quite different nutritional makeup. Some for beef cattle, very little for dairy cattle. The fact that they are both animal feeds does not mean that they are in the same market.

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