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New Study Says High Grain Prices Are Likely Here to Stay

Good
Good and Irwin suggest that the market is entering its third period of sustained increases in grain prices. Click to enlarge.

An ethanol-influenced spike in grain prices will likely hold, yielding the first sustained increase for corn, wheat and soybean prices in more than three decades, according to new research by two University of Illinois farm economists.

Corn could average $4.60 a bushel in Illinois, nearly double the average $2.42 a bushel from 1973 to 2006, said Darrel Good and Scott Irwin, professors of agriculture and consumer economics. Price swings stemming from weather or other market variables could send corn as high as $6.70 a bushel or down to $3, based on a review of market data dating back to the mid-1900s, according to the report “The New Era of Corn, Soybean and Wheat Prices.”

Current market fundamentals center on large amounts of corn used for ethanol production, suggesting that corn prices will continue to be closely tied to energy prices in the immediate future and that the price of the other two crops will have to be competitive with the price of corn. At the margin, the simplest way to think about corn prices is the value of corn to the ethanol producer. To a large extent, the value of corn is a function of the price of ethanol, which is a function of the structure of subsidies and the price of gasoline. In turn the price of gasoline is a function of the price of crude oil. As a result, a key variable in determining the level of corn prices in the future is the price of crude oil.

—Good and Irwin

Soybean prices could average $11.50 a bushel, up sharply from an average of $6.15 from 1973 to 2006, with swings from $8.20 to $19 a bushel. Wheat could increase to an average $5.80 a bushel, up from $3.24, dipping as low as $3.30 a bushel or as high as $10.15.

Although the forecasts are based on Illinois grain prices, Good says increases will likely be similar on a percentage basis in other grain-producing states. Irwin says the study stemmed from concerns as farmers tried to get a handle on rising prices when markets turned volatile in the wake of the ethanol boom.

Research revealed just two earlier lasting increases in grain prices. The first came after World War II, when price controls were lifted and post-war rebuilding began. The second lasting increase began in 1973, sparked by shifts in exchange-rate policies, massive grain purchases by the former Soviet Union and a period of escalating energy prices and more rapid inflation.

Good says the dawn of the new era mirrors the earlier ones, driven by the growth of ethanol and accompanied by higher inflation and production costs that have been permanently inflated.

The study forecast average prices for the new era based on increases between the World War II and post-1973 eras, which ranged from 79% for wheat to 134% for soybeans. It also accounts for fluctuations as the new higher prices take hold, setting a range of possible highs and lows based on data from the first five years of the earlier eras.

Irwin says the new price era could easily last two or three decades, sustained by corn prices that are now tethered to near-record gasoline prices because of ethanol.

The key is what happens in our crude oil and energy markets. The risk on the downside is technological breakthroughs that would dramatically reduce oil consumption, lowering the whole price structure. If anything, though, the risk is on the other side. We likely are going to continually be bumping into demand for crude-oil production that we can’t easily get above.

—Scott Irwin

Good says new era prices would not be affected by a shift from ethanol to another fuel additive made from crops, such as switchgrass. Finite land available for production would continue to drive up prices for other grains, just as corn has raised prices for soybeans and wheat.

We would have to steal land away from corn to grow a different energy-related crop, so now you have that competition again

—Darrel Good

Irwin says food costs have likely seen the worst of the shift to higher-priced grain after posting 5 to 6% increases this year, but warned that commodities account for just 20% of food costs, so prices could still rise to cover labor, transportation or other expenses.

Good and Irwin say Illinois farmers posted record earnings in 2007, and likely will again this year. But profits will ultimately dip back to historical levels of roughly $50 to $60 an acre as land and production costs rise to keep pace with new era prices.

The real winners in this are landowners. If history is any guide, we will see every ounce of the operating margin bid into land and cash rents.

—Scott Irwin

Resources

Comments

Albert G


As always, the best thing that we can do to appease our god of Global Warming is to burn our food for fuel. The mighty god of Global Warming (who can not be questioned or hoards of her emotional worshipers will attack, verbally, and as seen in Great Briton recently, physically) will start to be appeased.

OHHHhhh Great god of Global Warming... Save us!!! Please saaaaave us!!! I will burn my steak dinner tonight as a good faith effort...

Global Warming God

Albert...

Good faith is not enough lad. Throw two, maybe three global warming skeptics on the grill and I will reconsider.

Your GWG

lou

High grain prices are here to stay? With the 30% drop in oil which will lead to lower production costs and demand for ethonal I do not see how the current price levels can be maintained. Also using switchgrass for ethonal production will not neccesarly compeate for the same land as grain crops. Switchgrass can use far more marginal land for production.

Lad

Simple supply and demand with a little speculation on the side will keep grain prices climbing over a long period; on the demand side the U.S. supply of grain is stressed by countries who buy our grain for food as well as the nation's food needs. Add in the import tariff on Brazilian ethanol, that shorts the market, and the growing national market for fuel ethanol, and that's all the props you need to keep the price high.

mahonj

Look at the graph.

They are trying to make predictions from about 3 year's data and look at the spike in 1997 - these guys are full of it - or perhaps, just exceeding their brief a bit.

It may happen, but I could not predict it from data like they are using.

K

Ooh! Professors of agriculture and economics predict grain prices may not fall. And price swings can occur due to weather and other market factors. And demand for ethanol made from grain affects grain prices.

Well. They have certainly solved several of the great unresolved questions.

Freddy B

commodity prices are detached from simple supply and demand fundamentals. For example the drop in oil has come fast and hard when everyone was screaming we were running out of oil institutional investors were starting to pull out. When and if grain prices fall I dunno, however its to early to cry wolf now.
Regards.

Ben

The price of grain is effected more by oil then ethanol. the resent drops in oil prices is because economies have slowed demanding less, we can easily keep oil cheap: starve all the buyers.

ToppaTom

Those two university farm economists were just heeding the advice if their dean.
“Publish, publish anything, just publish.
No one will critically review your work.”

good advice...

Jon

If anyone actually looked at the graph they would notice that the increasing price of grain has not even matched inflation let alone recent fuel, machinery, pesticide, herbicide, and fertilizer price fluctuations. Ask yourself how much a car or house or for that mater a box of corn flakes cost in 1974.

Bryan

I think that people are a little too worried about higher grain prices. Just in terms of inflation, it is amazing they stayed this low for so long (just shows you how much capacity for production we actually have). I think it's great that the average farmer isn't scraping by making $30000 per year working 16 hour days in the summer anymore. The boost to farm income has, in part, kept our economy moving.

sjc

One economic principle says that something priced too low (or free) will be misused. While this may not be the case for corn, we can see that like oil on the world market and gasoline in the U.S., grains have been low priced for quite a while.

This may not be good for developing countries that import grain, but helping them become self sufficient producers makes sense. We provide the the equipment and know how and there is less transportation of billions of tons of grain over long distances, saving energy as well.

I agree with Topper Tom, he's probably right but the article is published as fact.
I agree with Jon, the fact that we have driven our farmers to the point of financial collapse or simply driven them off the farm over the past 60 yrs is disgusting, we want cheap food to free our money up for other things such as cars, boats and bigger houses!!

Buy local, you will reduce green house gases and support local community farmers, we need them to continue to grow our food 'and' make money.

Kit P

I have not checked the following against a reference but it sounds responsible:

“....in fact, for years the global development community has worried about low
crop prices helping impoverish farmers in poor countries. (7) By most accounts, corn grain
ethanol has been good for U.S. farmers and U.S. taxpayers. Despite the argument that we are
burning food to make fuel and depriving the world of corn grain, U.S. corn exports rose 6
percent in 2007; a $3 billion ethanol subsidy reduced crop support payments by $6 billion,
and reduced the US trade deficit by more than $20 billion. Most economists agree that the
increase expenditure of U.S. consumers for food has been more than offset by reduced fuel costs
and taxes.”

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