January 26, 2004
A NEW ERA FOR CORN AND SOYBEAN PRICES?
The annual U.S. average farm price
of corn in the 1960's ranged from $1.00 to $1.24. The average prices
of soybeans ranged from $2.13 to $2.75 per bushel. The world changed
beginning in the early 1970's, as there were significant crop problems
around the world and the former Soviet Union began importing commodities.
The average price of corn jumped to $1.57 in 1972, $2.55 in 1973,
and $3.02 in 1974. The average price of soybeans jumped to $4.37,
$5.68, and $6.64 in each of those years, respectively. It was the
beginning of a new era for prices.
The current market situation for these crops is characterized by
a small U.S. soybean crop in 2003, a high rate of soybean consumption
by China, declining competition from China in the corn export market,
a weak U.S. dollar, rapid expansion in consumption of corn for ethanol,
small U.S. and world grain inventories, and relatively high prices.
Are these markets embarking on another new era of higher prices?
The inability of corn and soybean prices to remain at consistently
high levels historically makes us initially skeptical of such prospects.
The high corn prices of the early 1970's quickly faded by the late
1970's. Prices were at relatively high levels from 1979-80 through
1984-85, fueled in part by small U.S. crops in 1980 and 1983. Since
1983-84, however, the annual average farm price of corn has averaged
above $3.00 only in 1995-96 and averaged under $2.00 from 1997-98
through 2001-02. The annual average price has been above $2.50 only
11 times in the past 30 years, most recently in 1996-97. The price
pattern for soybeans has run a similar course. The annual average
price was above $6.00 only 12 times in the past 30 years, most recently
in 1997-98. The average was under $5.00 from 1998-99 through 2001-02.
The highest average price occurred 20 years ago.
The last extended period of relatively high corn and soybean prices
was from 1995-96 through 1997-98. The so called "freedom to
farm" program of 1996 was enacted during a period of dwindling
world inventories and relatively high prices. Many suggested that
we were on the brink of a new ear of strong demand and consistently
high prices, and it appeared that was the case. Consistently large
crops in the late 1990's, along with a significant economic slowdown
in Asia, proved those expectations wrong.
What is different now? There have been at least two important changes
on the demand side in recent years. First, demand for agricultural
commodities in Asia, particularly in China, has grown rapidly and
China is now a major importer of soybeans. Second, the demand for
corn for ethanol production has increased and is now institutionalized
by federal and state subsidies. On the supply side, the world has
not been able to maintain grain production at consistently high
levels. Record world production of both wheat and feed grains occurred
in 1996-97 and has been highly variable since. Wheat production
has been especially small for two consecutive years. In addition,
average soybean yields in the U.S. seem to have reached a plateau,
with the record yield now 10 years old. In contrast, world soybean
production continues to expand rapidly, due to growth in area devoted
to soybean production in South America.
For the near term, it appears that the combination of small inventories,
a rapid rate of consumption, and the uncertainties of the 2004 growing
season will support corn and soybean prices at relatively high levels.
However, it is unlikely that soybean prices can be maintained for
long periods at the current level. For the 2004-05 crop year, prospects
for continued tight world supplies should also be price supportive.
The most uncertainty, as always, surrounds the prospects for U.S.
and world production in 2004 and beyond. That is, what sort of weather
patterns will be experienced?
The 2004 U.S. corn and soybean growing season will be extremely
important, starting with indications of planted acreage on March
31. All available acres will be planted, so that prices do not have
to move higher in order to "buy" acreage. Relative prices
may be important in determining acreage of individual crops, but
many planting decisions have already been made. It is not possible
to determine whether prices have entered a new era, like that which
occurred in 1972, or are just experiencing a blip similar to those
that have occurred over the past 30 years. However, the result of
the current high prices is that the market is now offering relatively
high prices for the 2004 crops and above average prices for the
2005 crops of corn and soybeans.
Issued by Darrel
University of Illinois