The new era of crop prices: A five-year review

The projections of the ranges in the average monthly prices during the first five years of the new price era was based on the ranges actually experienced during the first five years of the previous two eras. The lowest and highest average monthly prices during the first five years of each era was calculated as a percentage of the average price for the entire period. The percentages were averaged for the two periods and the average was used to project the range in monthly prices in the new era.

Table 1 summarizes the projections of average prices and price ranges for the three crops for the new era that began in December 2006 along with actual averages and ranges from December 2006 through December 2012. Average monthly prices in the first 73 months of the new price era were close to projections for corn and wheat. Ranges in average monthly prices were also close to projections for wheat, but the highest average monthly corn price (August 2012) exceeded the projection by $0.88. Soybean prices have deviated most from projections, with the average exceeding the projection by $0.53 and the lowest and highest average monthly prices both lower than projected.

Distribution of Average Monthly Prices

To develop expected distributions of monthly average prices we started with the calculation of the percentage deviations of monthly farm prices received in Illinois from the average price in the previous era. For example, the average (nominal) price of corn in the previous era (January 1973-September 2006) was $2.42 and the price in January 1981 was $3.20, or 32 percent higher than the average for the era. The expected average price for the new era is $4.60. We can then state an equivalent percentage deviation to the January 1981 price for the new era as 4.60 X 1.32 = 6.07. In other words $6.70 represents the equivalent 32 percent deviation above the average price for the new era as $3.20 does for the previous era. We did this same calculation for every month for corn, soybeans, and wheat over January 1973-September 2006 to simulate the variability of prices we expect in the new era. The expected distributions of monthly average prices are presented in Figures 1, 2, and 3.

Based on monthly average prices from December 2006 through December 2012, the actual distributions of prices so far in the new era are shown in Figures 4,5, and 6. Several observations can be made about the actual distributions of average monthly prices relative to the projected distributions. For corn, the frequency of prices in both the upper end and lower end of the price range has been larger than projected. The highest frequency of average monthly average prices has been in the $3.25 to $4.00 range. Most of those prices occurred in the first two years of the new era and again in 2009. For soybeans, the actual distribution of prices has been more similar to the projected distribution than for corn, but with a wider range and higher overall average than projected. The price distribution for wheat has tended to be bi-modal, with the highest frequencies in the $3.75 to $4.75 and $6.00 to $6.75 ranges.

Conclusions

Despite some differences between projections and actuals, the new era projections for the price of corn, soybeans, and wheat that we made almost five years ago have held up remarkably well. While the approach is certainly simple, it appears to provide robust expectations for crop prices in this new era. Tomorrow, we will use the actual Illinois monthly average prices of corn, soybeans, and wheat for December 2006 through December 2012 to evaluate whether the original projections of average prices and price distributions in the new era need any modifications. We will also use the new era projections to evaluate the current level of prices in these markets and draw implications for marketing 2012 and 2013 crops.

Source: Scott Irwin and Darrel Good, Department of Agricultural and Consumer Economics, University of Illinois