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

In a 2008 report and a 2009 article we addressed whether the trend towards higher crop prices that started in the Fall of 2006 was here to stay. Our analysis was motivated by the need of farmers, landowners, and others in the agricultural industry to have some reasonable way of assessing long-term price prospects. From a farmer's standpoint, the question basically came down to this, "What is a good price for corn, soybeans and wheat?" We argued that corn, soybean, and wheat prices moved to a new, higher nominal price level beginning in about December 2006. We suggested that the new price level would persist for an extended period of time and we projected the likely average Illinois monthly price and range in monthly prices for those commodities in the first five years of new era. Based on average monthly prices through February 2011, we evaluated the accuracy of those projections in a post on March 29, 2011. The projection of the expected distribution of monthly average prices was presented in a post on November 18, 2011. Here, we briefly review the methodology for projecting the average monthly prices, the range in monthly prices, and the distribution of monthly prices and then provide an evaluation of those projections based on average monthly prices in Illinois for the 73-month period from December 2006 through December 2012. The prices used are those reported by the USDA's National Agricultural Statistics Service in the monthly Agricultural Prices report.

Average Monthly Prices and Price Ranges

The projection of average monthly prices in the new era was centered on corn since it was believed that the new era of prices that began in late 2006 was associated with the rapid expansion in biofuels (ethanol) production and the impact on corn demand. The analysis began with the identification of two previous price eras for corn and the change in average price between those two periods. The first era was the post-war period that extended from January 1947 through December 1972 when the average monthly corn price in Illinois was $1.28 per bushel. The second period, associated with the rapid increase in corn export demand in 1973, extended from January 1973 through November 2006 when the average monthly price of corn was $2.42. The projection of the average price in the new era made the simple assumption of an equal percentage price change from the previous era that occurred between the previous two eras. The average price projection of $4.60, then, was calculated as [($2.42/$1.28) X $2.42]= $4.60. The average price of soybeans was based on an expected ratio of soybean to corn prices of 2.3, resulting in a projection of $10.58. Likewise, the average price of wheat was based on an expected ratio of wheat to corn prices of 1.26, resulting in a projection of $5.80.

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