Examining factors behind long term corn and soybean prices

The recent decline in farm prices have underscored a question that has existed throughout the recent period of higher prices, has a new era of farm prices emerged? As is usual among economists, disagreement exists concerning a new era. This article joins the discussion by using market history to identify key factors that have helped shape current corn and soybean prices.

A key question confronting the outlook for U.S. corn and soybean prices is what is their long term equilibrium? In considering this question, it is important to acknowledge that U.S. corn and soybeans exist in the broader world grain and oilseed markets. These broader markets must be understood.

A review of world grain and oilseed supply and demand over the last 40 plus years suggests a key factor determining future corn and soybean prices will be which increases faster: world grain yield or world grain consumption? The answer will determine if more land is needed for grain production or if land in grains can be shifted to meet the growing demand for oilseeds.

Here are some thoughts to consider.

• While future growth of grains as a source of biofuels will be a key factor influencing world consumption of grains, a more important factor likely will be whether the increased growth in world consumption of grains for feed since 2010 can be sustained or whether it is a temporary increase that returned world feed consumption back to its pre-ethanol growth path.

  • A decline in crop yields is a widely discussed concern. This review finds no clear evidence that the growth of aggregate world yields of grains and oilseeds is slowing. Evidence is found that suggests the annual variability of these yields, in particular grain yield, may be declining.
  • Another key question is: what is the normal level of stocks? Ending stock-consumption ratios have increased for world oilseeds, likely stabilizing the annual growth in world oilseed consumption. Has this ratio now reached a normal level and no longer needs to build? For world grains, have changes in world transportation infrastructure, an apparent decline in world yield variability, and the recent growth of corn production in the Southern Hemisphere lowered the normal level of world grain stocks? Or is the market understating the risks of production and other supply chain factors? In short, is the normal world grain ending stock-consumption ratio closer to the 1981-2001 average or the 2002-2010 average? Your answer to this question and the question posed for oilseed stocks profoundly changes your interpretation of the current level of world grain and oilseed stocks.
  • A factor that compounds understanding long term corn and soybean prices is the recent decline in input prices. Lower input prices, everything else the same, increases profitability and thus either increases supply or dampens the downward pressure on it. While exceptions are common, input prices in general follow crop prices during large crop price moves. Thus, it is important to ask how much can current input prices decline and how will crop prices react to their decline?
  • Rent has increased during the current crop price pullback. Will rent eventually decline? It declined by double digits during the two other large crop price pullbacks since 1973?
  • The lack of decline in rents raises the question of how widespread is the current stress in U.S. agriculture? Raising this question does not mean stress has not increased, particularly for individual farmers. But, for the sector as a whole is the current stress about adjustment to a more normal supply-demand situation from a very prosperous situation or is it a deeper stress? An early indicator will be how many acres of corn and soybeans, more broadly crops, do U.S. farmers plant this year? The higher the number of acres planted the lower the indication of aggregate stress.
  • The strong evidence that input prices in general decline when farm output prices decline raises an important question with farm policy and management implications: How risky is farming?
  • While a historical trend does not always continue into the future, it is important to consider it and to have a rationale for why it no longer applies. Otherwise, a reasonable guess is that the historical trend will reassert itself. It is thus useful to keep in mind that the 2001-2005 real price of corn and soybeans adjusted for inflation since 2005 implies a crop year price for corn and soybeans of $2.70 and $7.20, respectively. To be more specific, unless world grain consumption continues to grow faster than world grain yield or unless world consumption of oilseeds grows faster than its historical rate (such as via biofuels) it is reasonable to expect that over time real corn and soybeans prices will work their way toward these real price levels. Note, this is not a price forecast for the coming crop year. It is what history suggests the underlying price pressure over the longer run could be.

In summary, the sharp decline in corn and soybean prices since 2012 may be coming to an end and higher prices may be ahead as the string of good world weather is replaced by more normal or stressful weather, or demand growth accelerates. However, history suggests it is also possible that further declines are ahead. This article has not attempted to answer which scenario is more likely. Instead, it has pointed out key relationships and questions that a historical review of world grain and oilseed markets suggests you should monitor as these dynamic markets answer which scenario emerges. However, because further declines are potentially possible, this review clearly implies that effective management requires attention to the possibility of this outcome and thus aggressive management of costs and input productivity is in order.

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