Sometimes economics can explain seemingly irrational behavior. For corn, we need to ask why domestic buyers are sourcing their corn from other continents when their “neighbors” have lots to sell them.
Corn Markets
Let’s set the scene with a look at the domestic corn market. You can see below that price has dipped down to $3.50 a bushel:
And yet lots is still being planted. An FT article says that this year, farmers are planting the third highest amount of corn on record.
So far, we could guess that cheap U.S. corn is a bargain that no one could refuse.
The picture changes though when we look at transportation. The boat (from South America) is cheaper than the train (from the Midwest). Less than half, shipping by boat is $.35 to $.50 cents a bushel while rail runs $.80 to $1.50. Then, for the icing on the cake (which according to food writer Michael Pollan probably contains corn), we have the strong dollar that makes imports less expensive. Put it all together and importing corn from South America no longer seems so illogical.
We should note that while the volume of imports is small compared to the domestic market, the USDA projects 50 million bushels will have been imported this season, a 56% spike from last year. However, if the price of corn sinks further, the whole story could change.
Our Bottom Line: Supply and Demand
We could have used a supply and demand graph to tell the corn story. All we have to do is shift our supply curve to the right so that it includes cheaper imported corn. When transportation makes a commodity relatively cheaper and imports increase volume, then we have our supply curve shifting to the right:
I suspect though that the amount of imported corn is so small that its impact on the supply curve would have been rather undetectable. Still, supply and demand dynamics can explain a seemingly illogical decision.
