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The Park Place Economist

Abstract

Droughts are among the most feared natural disasters. They can affect the lives of many people such as farmers, consumers, or commodity traders. Droughts have taken a year’s work and salary away from farmers, led to higher prices for consumers, and taken the life savings away from some speculators. There has been a recent push in science to better understand the enigma of a drought. However, the research has not yet prevented people from losing a lot of money. The best way to protect people is by understanding how prices react to droughts. Agricultural prices are inherently unstable, primarily due to a combination of inelastic demand for food and production that is subject to the natural vagary of weather. The agricultural product on which this research focuses is soybeans. In particular, I will focus on the November futures contract because it has the most liquidity in the season after the crucial August weather.

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