The New York Times reports that the US Agriculture Department increased its prediction of the size of this year's corn crop by 2 percent to 9.012 billion bushels. On the day of the announcement, the price of corn futures to be delivered in December, 1996 fell 6.25 cents to $2.84 a bushel, the lowest price since August 1995.
The "elasticity of demand for a commodity" is defined to be the percent change in quantity divided by the percent change in price as one moves along the demand curve. If the price decrease on the day of the announcement is interpreted as the effect of a movement along the demand curve due to a 2% increase in the quantity of corn, what must be the elasticity of demand for corn?
By how much did the total money value of the expected corn crop rise, or fall as a consequence of this news?
It is reasonable to guess that this 2% increase was not a complete surprise. Many commodity traders keep track of the weather in the midwest and get crop reports from farmers before the USDA reports come out. A commodities analyst was quoted as saying "People thought the crop was getting bigger but not this big." Suppose that the day before the announcement, traders thought the USDA would report a 1% increase instead of a 2% increase. Then the predicted crop would only be 1% higher than people expected it to be. If that is the case, what would be your estimate of the price elasticity of demand for corn?
Unlike the revised forecasts in corn, soybean, and cotton crops, where the revisions were due to better-than-expected weather, the entry of the new orange groves can not have been a surprise, since they were planted several years ago, and the USDA keeps track of such things. Would you expect the USDA's report that orange crops will be larger because these groves are now producing to change the price for November orange juice futures?