Illinois economists: Can 1 monster crop end new grain price era?

By Susanne Retka Schill | December 31, 2014

A look at history gives some clues as to whether the recent low prices for corn, soybeans and wheat are signaling an end to the new era of higher average crop prices. University of Illinois agriculture economists Scott Irwin, Darrel Good and John Newton recently summarized their presentations examining that question given in a series of farm meetings across Illinois in mid-December.

The FarmDoc Daily post, “Can One Monster Crop End the New Era of Grain Prices?”  points out that the new era of higher prices was primarily driven by the rise of ethanol production. “There has been a plateauing in U.S. corn use for ethanol production since 2010, but the plateau is at a very high level, around 5 billion bushels,” they write. But while much attention has been paid to the ethanol demand in commodity fundamentals, the soybean market is just as important, they said. “A second important fundamental driver is China's demand for soybeans, which has continued to grow at an impressive pace in recent years. China is projected to import over 2.7 billion bushels in 2014-15. This represents over 60 million acres of soybean production around the world. In our view, the combination of these two demand factors continues to provide strong support for the new era projections going forward.”

Another approach to analyzing the situation, they suggested “is to ask whether recent price levels are more likely to have been generated by the previous era price distribution or the new era distribution. In corn, the answer is ambiguous because recent prices in the low $3 range are consistent with both the upper tail of prices in the old era distribution as well as the lower tail of the new era distribution. This is not the case, however, for soybeans and wheat, as recent prices are highly unlikely to have been generated by the old era distribution. If the new era was really over, one would think that the answer would be ambiguous for all three commodities.”

If the new era is still with us, then why the current low prices, they asked. “For corn, the best explanation is a leveling demand in the face of a very good U.S. yield in 2014. Soybeans are particularly interesting because the yield in 2014 actually outranks corn in terms of positive deviation from trend. The difference is that export demand continues to rise.”

Looking at the length of the runs of below-average prices historically, the economists suggested it is unusual for a long run of above average prices to be followed by a long run of below average prices. “The more likely outcome is a series of positive and negative runs of varying but shorter lengths,” they conclude.