Since corn planting this spring, the USDA has dropped its corn production projection from 14.8 billion bushels to 10.8 billion bushels, a decline of 27 percent. During this same time, the price of corn has increased by about 40 percent.

This is a rough illustration of what economists would expect. Why?  Because it is well known that the corn market is price inelastic. (Stay with us here, it’s easier to see this than you might think.) The minus 27 percent and 40 percent numbers are consistent with a demand elasticity of minus 0.675 or a price flexibility of minus 1.48. What this means in plain English is that for each one percent drop in output, the price increases by 1.48 percent. So, in this illustration for the 27 percent drop in output, the price increases by negative 1.48 times negative 27, or 40 percent.

How this affects farmers’ bottom lines, of course, depends on how much yield reduction they experience on their farms. Those farmers whose yields decline by, say, 25 percent or less will see higher revenues than they expected at planting time. Farmers lucky enough to have trend or even higher yields could have their best revenue and net income years ever.

The profit or loss for farmers whose yields drop by more than the percentage decline at national level will depend upon whether or not they bought crop insurance and what options they chose.

At one end of the spectrum, farmers with substantially reduced yields but who purchased a high level of coverage with the harvest-price adjustment could see per acre corn revenue greater than what they expected at planting time (http://www.farmdocdaily.illinois.edu/004602print.html). For those who bought low levels of coverage and did not purchase the harvest-price adjustment, this year could well be a financial disaster.

It would appear that while crop insurance provides a safety net for farmers, the net is somewhat leaky, guaranteeing pure profit for some while leaving others with significant losses.

Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and is the Director of UT’s Agricultural Policy Analysis Center (APAC). Harwood D. Schaffer is a Research Assistant Professor at APAC. (865) 974-7407; Fax: (865) 974-7298; dray@utk.edu  and hdschaffer@utk.edu;  http://www.agpolicy.org.