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EC SD | The oil companies know how much oil a new well will produce more accurately than a grain farmer knows the yield they will harvest when it is planting time. They can drill wells at any time of the year and are not weather nor season dependent. Oil companies often hedge half of their expected production ahead of producing it, usually with costless collars. This helps them ride out the volatility of price changes and covers their fixed costs.
If oil markets are over-supplied, the futures prices fall and the intensity of drilling goes down. If prices really decline, to unprofitable levels, some wells will get shut in and freshly drilled wells won't get completed. There is no lost production as the oil just remains in situ underground until demand catches up. The oil companies basically have decades of storage available to them underground, so can easily match market supply to market demand. Also oil companies generally pay production-based royalties instead of fixed annual payments to the land or mineral rights owner. This allows their costs to decline when their production rate declines.
With grain, the similar market price signals are there, but farmers have only a month or so to plant each year. If they don't plant, there is a permanent loss of production from fallow fields, for a whole year, and they are left in a cash-flow crisis to pay their fixed costs. Land owners won't accept zero rent for an unplanned fallow year. Grain farmers generally have less than a year of storage available, and cannot delay the sale of their production for years. Farmers rarely hedge half of expected production before planting starts.
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Grain supply just like the Oil supply?
