Lesson 04 · 3 min · 5 things to do
Why a good harvest can ruin a farm
Work out what happens to income when everyone has a bumper year.
Perfect weather everywhere produces a record harvest. What happens to farm incomes?
- Yes.Demand for staple food barely moves with price or supply. A 20% bigger crop has to be sold to people who wanted roughly the same amount, so the price falls further than the volume rose.
- Not quite.More at a much lower price. This is the single most counter-intuitive fact in agricultural economics, and it is why good years are dreaded.
- Not quite.That would need demand to rise in step with supply, which is what does not happen with food.
People eat about the same amount of food whatever it costs. That one fact makes farm income move opposite to the harvest.
Slide the size of the harvest and watch total farm revenue.
Poor (−20%)NormalRecord (+20%)Tonnes sold80 indexPrice165 indexTotal revenue132 indexPoor (−20%)Scarcity. The price rises far more than the volume fell — and the farms that lost their crop get nothing.
Tonnes sold100 indexPrice100 indexTotal revenue100 indexNormalThe baseline year.
Tonnes sold120 indexPrice60 indexTotal revenue72 indexRecord (+20%)A glut. Twenty per cent more to sell, at little more than half the price.
Why does a 20% larger crop cut the price nearly in half?
- Yes.When demand barely responds to price, a small surplus needs a large discount to clear. The same arithmetic in reverse is why a modest shortage causes an alarming spike.
- Not quite.The effect appears in open markets with thousands of buyers.
- Not quite.Quality varies year to year in both directions. The price move is about quantity.
Move the control to see what changes.
Which of these is good for an individual farm?
A record crop on your farm, and an average one everywhere else.
A record crop everywhere, including yours.
A poor crop everywhere, and an average one on your farm.
A poor crop only on your farm.
An average year everywhere.
Yes.What matters to a farm is its own harvest RELATIVE to everyone else's. That is an uncomfortable structure to sit inside, and it explains why farming has so many collective institutions — boards, cooperatives, buffer stocks — built specifically to escape it.A farm sells 120 tonnes at £60 instead of 100 tonnes at £100. What is its revenue, in pounds?
£Yes.£7,200 against £10,000 — a 28% fall, in the best growing year of the decade, having done everything right.Why do so many countries intervene in farm markets when they leave other industries alone?
- Yes.The intervention is argued about endlessly and the reason for it is structural. Free prices reward scarcity in a good that nobody can go without — and that is a genuinely different situation from selling furniture.
- Not quite.Often true, and it explains the SHAPE of the intervention more than its existence — which is found across countries with very different farm lobbies.
- Not quite.Yields per worker have risen faster in agriculture than in almost any other sector.
Lesson complete
People eat about the same amount whatever it costs, so a record harvest can ruin a farm.
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