Historic Cycle Predicts Lower Prices

Based on 29-year theory, we're headed for 10 years of tighter margins and lower volatility

 

A few clues from our past may help determine where grain prices are going. Then again, what you're about to read may all be pure speculation.

Purdue Ag economist Chris Hurt (photo below right) has analyzed historic corn prices and concludes that, in general, prices stay relatively low over time due to excess supply compared to demand – with a few glorious exceptions.

He's identified four distinct 29-year time-periods where world or national events caused a price run-up, brief peak period, a cooling off period, and eventual new base.

"Over the course of those 29 years, farming is tough, then interesting, then wonderful, then scary, then tough again," says Hurt.

Prices tend to cycle up and correlate with major world events; for example, 1917 (WWI), 1947 (WWII) and 1974 (Soviet grain purchases) were all peak price years.

So where are we now? According to Hurt's analysis, we are now in the middle of a cycle (1994-2022) and heading through a landing period, after a peak in 2008. According to his theory we're headed for a new base equilibrium price that won't change much from 2013 through 2022.

"These cycles suggest how much of the time you are going to be in surplus production, where prices will be relatively low," he says.

If he's right, how low will prices settle for the 10-year upcoming period?

If you look at the last three cycles from 1903 on, prices were 41% higher in the launch, 243% times higher in the spike, 62% higher than the base in landing; then settled at 50% higher in the 'new' base compared to the original base price (adjusted for inflation and yields.)

Watching for key factors – world demand, government policies (CRP, biofuel subsidies) or inflation may trip certain price patterns into play, giving you more information for your marketing plan.

You might think farmers could just ratchet back production to stop a price skid in the cycle, but it's not that simple. Once new farmlands and technology are put in place, they are not quickly reversible. It takes a long period of low margins and discouragement to get supply down to meet demand.

Ups and downs

Hurt likes to take the long view when analyzing grain markets. Like, 150 years of data – or more. A few highlights:

*the price of corn was 75 cents a bushel in 1866, part of a post civil war declined that ended up at 25 cents per bushel over the following 30 years. Prices 'spiked' to $1.50 per bushel during WWI when the U.S., Canada and Australia supplied a lot of food for the world

*Prices dipped into the 1920s and '30s due to the Great Depression and dust bowl. Thanks to price controls and government policies, price 'strengthened' to $1 through WWII

*Pent up demand from WWII blew the top off corn prices as they spiked from 1945 to 1951

*Prices jumped to a high of $3 per bushel in the early '70s, thanks to "the Great Grain Robbery" (Soviet Union grain purchases).

*Farm crash of 1980s forced prices to dip through early '90s

*Oil price spikes and global food demand push corn over $7 per bushel in 2008

For the full story on historic price cycles, watch for our Oct. 2010 issue.

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