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It’s Different This Time — Just Like The Other Times?

As we write this column, March 2011 corn futures closed at $6.87/bu., wheat at $8.53/bu., soybeans at $14.33/ bu., rice at $15.80/cwt, and cotton at $1.67/lb. We are seeing a second wave of a general price increase for commodities that began in late 2006 and saw its first peak in 2008, followed by a retrenchment.

Parallels have been drawn to the early 1970s when prices rose after the Soviet Union entered the international grain market, producing a wave of optimism in the farm community.

The positive outlook was bolstered when the U.S. secretary of agriculture told farmers to plant fencerow to fencerow. In 1974, the World Food Conference was held in Rome, and delegates established a goal of eliminating hunger within a decade. Farmers were told that demand for food would exceed production for the next quarter-century. It appeared that farm prices had reached a new plateau.

Unfortunately for farmers, commodity prices weren’t the only things that went up. Input prices went up as well – fuel, fertilizer, and farm equipment. Prices quickly retreated below the cost of production. Farmers were desperate, and the late ’70s spawned the American Agriculture Movement, farmers marching down Pennsylvania Avenue in 1978, and a massive tractorcade in February 1979.

An agricultural price peak, both in the ’70s and 2006-11 is not the only parallel that can be drawn between the two periods. As soon as agricultural commodity prices began to remain high into 2008, we began to hear that prices had established a new plateau, similar to what we saw in the 1970s.

Another parallel is the expectation that demand will exceed supply for the foreseeable future. First, this expectation was tied to ethanol and the production of biofuels. Then, the expectation of the increasing need for U.S. grain exports to produce the meat that is being demanded by a growing middle class in developing countries began to be circulated once again. That expectation refuses to die, it just keeps getting moved into the future. Yet the U.S. is expected to export only about two billion bushels of corn this crop year, which is well below the 2.4 billion bushels exported in 2007 and in 1989 – yes 1989.

And concern is being expressed over whether agricultural production can grow quickly enough to feed the three billion increase in population that is projected by 2050.

Those talking about a new price plateau mention increased production costs, increased middle-class demand from developing

countries, and the projected population increase as factors that will support continued higher crop and livestock prices. The parallels to the 1970s are indeed striking, a time when production costs were increasing and the expectation was that demand would outstrip production for the foreseeable future.

SUPPLY ALWAYS INCREASES

As we saw in the 1998-2001 period, the connection between production costs and price are tenuous at best.

Also, “we” tend to focus on future demand growth considerations but also tend to give much less consideration to supply growth potential. Since the 1970s, corn yields have increased by 60 per cent and until farmers spurred the development of the ethanol industry, production outstripped demand.

We know that there are now over 300 million additional acres in Brazil that can be brought into

production. That is more area than the U.S. devotes to major crop production. Seven-dollar corn, $14 soybeans, and buck-and- a-half cotton will draw some of these acres, and acres in other countries, into production in the near future. Both China and Brazil are ramping up investments in yield-advancing research and production practices.

In the 1970s, neither production costs nor demand growth were enough to sustain prices. It is this final possible parallel that scares us. Farmers have no direct means and in the short run, limited indirect ability to pass production costs on to purchasers. Crop agriculture will not see another four-billion- bushel growth in the use of corn for ethanol production. That leaves exports. But over the last three decades grain export expectations have been a pot of gold at the end of an ever-distant rainbow. Maybe this time.

To us it is clear that the odds are not in crop-agriculture’s favour. While in the 1970s Congress increased the price floors under major crops when prices fell below ballooning production costs, provisions in recent farm programs are not designed to do that. There is nothing to stop a free fall of crop prices. Today’s version of the price declines that drew the tractorcade in the late 1970s could easily occur again.

So what would happen this time if prices tumble to well below the cost of production? Congress can do nothing and thereby watch land prices drop by one-half and potentially bankrupt even some of the most efficient crop producers, or it could subsidize grain users and bankrupt farmers in other countries by providing emergency payments to U.S. farmers.

Not a very appealing choice. Daryll E. Ray and

Harwood D. Schaffer are with the Agricultural Policy Analysis Center

(APAC) at the University of Tennessee.

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YettheU.S.isexpectedtoexportonlyabout twobillionbushelsofcornthiscropyear, whichiswellbelowthe2.4billionbushels exportedin2007andin1989yes1989.

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