Ag economist: Commodity prices cyclical, but unpredictable

July 15, 2010

WEST LAFAYETTE, Ind. - What goes around comes around, even with commodity prices.

Prices climb unusually high and then drop quickly about every 30 years, said Chris Hurt, a Purdue University agricultural economist. The price spikes often are brought on by wars and currency devaluation - unexpected events that are difficult to predict, he said.

Hurt will discuss price spike cycles during a session of Top Farmer Crop Workshop. The 43rd annual workshop, hosted by Purdue Extension and Purdue's Department of Agricultural Economics, will take place July 18-21 in the Pfendler Hall Deans Auditorium on Purdue's West Lafayette campus and at Purdue's Agronomy Center for Research and Education, located west of campus.

Annual U.S. corn prices rose from $2.08 in 2005 to $4.29 a bushel in 2007, before falling this year to $3.60, in prices adjusted to reflect 2010 dollars, Hurt said. The 2007 high price filled many in the agricultural industry with optimism that demand for crops will continue to exceed supply and farmland values can only keep rising. History teaches otherwise, however, he said.

"Those bullish arguments have been made at least three other times in the last 100 years," Hurt said. "Each of those price spike events was driven by events that caused a surge in demand. But each time those factors did not last."

Price spikes in 1917 and 1947 were tied to European food shortages caused by World Wars I and II and by the increased demand for U.S. grains, Hurt said. Corn prices peaked at $3.89 a bushel in 1917 and $4.50 in 1947, and dipped to $1 in 1920 and $2.62 in 1948 - again, in adjusted 2010 dollars.

In the 1970s a struggling U.S. dollar and a significant increase in commodities buying by the former Soviet Union sent corn prices skyrocketing from $3 a bushel in 1971 to $7.28 in 1974, Hurt said. By 1977 corn was selling for $4 a bushel in 2010 dollars.

The 2007-08 price spike was the result of demand growth for grains caused by a weak dollar, the rapid growth of biofuels and strong world income expansion.

Similar price cycles can be tracked for other commodities, as well, Hurt said.

It might be coincidence that price spike cycles have happened about every 30 years in the past century, Hurt said, "or, there may be reasonable supply and demand explanations. Regardless, there are lessons for farmers.

"First, it doesn't take long to draw land into production, as we've seen with very high prices, or to apply a huge amount of intensive technology to get those yields up very quickly. But it's harder to reverse and go back to using old technology once we bring new technology or new lands into production. This may be why in the post-price spike period we've tended to get that longer period where our supplies have exceeded demand, and this means long periods of relatively low prices and very tight margins."

Producers also should understand that many factors can contribute to price spikes, including farmland markets, the growth of developing countries and biofuels production, Hurt said.

"How overall supply and demand evolve will determine prices in the future," he said. "The examples from the past tell us to be cautious now that we may be in the post-spike period," he said. "As in those past cycles, we're not in an opportune time to be making major investments in land. Not to say do or don't buy farmland aggressively, but at least know the cautions that are out there."

Top Farmer Crop Workshop features more than 30 speakers from Purdue's College of Agriculture and sister land-grant universities, agribusiness professionals, and farmers. Sessions include such topics as global positioning systems and cellular technology, wind energy, soybean yield trends, cover crops, equipment sharing and management skills.

Enrollment is limited, and advance registration is encouraged. Onsite registration will begin at 5 p.m. July 18, space permitting.

Registration is $300 for the first person from a farm and $100 for each additional person from the same farm. Fees include two meals, refreshments, a workshop proceedings notebook and the opportunity to test farm plans using the B-21 linear programming analysis.

A $100 discount on full registration is available for first-time workshop attendees by using the discount code "TCFIRST" when registering online and by phone, or by writing the code on a mail-in registration form.

To register by phone, call Tom Robertson of Purdue Conferences at 765-494-7220. To register online and for additional information about workshop sessions, motels, parking and a Purdue campus map, visit the Top Farmer website at http://www.agecon.purdue.edu/topfarmer/conference.asp

Writer: Steve Leer, 765-494-8415, sleer@purdue.edu

Source:  Chris Hurt, 765-494-4273, hurtc@purdue.edu

Ag Communications: (765) 494-2722;
Keith Robinson, robins89@purdue.edu
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