Sunday, February 6, 2011

Forget the Super Bowl---Farmers are making an Allocative Efficiency decision that will affect the snacks you are eating right now!

Well, not RIGHT NOW, but in the near future...

WSJ: Cotton Farmers Jump on Rising Crop Prices
—The amount of land in the U.S. dedicated to planting cotton this spring is expected to surge 14%, according to a closely watched forecaster.

The National Cotton Council of America, an industry group, said on Saturday it estimates farmers will plant 12.5 million acres of cotton. As a result, the fall harvest is pegged at 19.2 million bales, an increase of 900,000 from the 2010 harvest. The amount of cotton in one bale is enough for about 1,200 T-shirts, according to the council.
Farmers are making an "Allocative Efficiency" decision to produce more cotton than---(fill in the blank).  Assuming there is not that amount of idle acerage, to produce more cotton is going to necessarily mean less of something else. This is illustrated in the graph below.

 The bundle of Cotton and Food produced is going to move from Cotton* and Food* to Cotton 1 and Food 1.  The opportunity cost for the farmer is somewhat minimal---the land, equipment and know-how to produce cotton is about the same as corn, wheat, soybean, etc.  They are looking for the most revenue per acre and cotton is the choice commodity at this time. 

Where the real opportunity cost is incurred in the domestic and international food supply.  We can't eat cotton, so domestic food production will be impacted in some negative way...Won't it??
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