High Commodity Prices: A New Plateau Or Top Of A Price Cycle?
Commodity price euphoria that has blown across the Cornbelt and breezed down Wall Street is still a bit ethereal. Most farmers are still trying to find the handles to determine whether it is the real thing, and how to hold on. Are we going to financially operate from a new and higher platform, or will we return to price levels somewhere reminiscent of the recent past. The farm gate is going to dust off its crystal ball today.
Agriculture today is a product of several dynamic forces, pushing and pulling on supply and demand. Purdue agricultural economist Mike Boehlje has identified three forces influencing supply and two influencing demand which he says is shaping the future of agriculture.
1) Ethanol and energy. By next year, 30% of the US corn crop will be refined into ethanol, and while demand for ethanol will continue, corn will have to yield to cellulosic sources. Boehlje says there are even concerns that in the coming year, the transportation infrastructure will not be able to handle ethanol demand. He also says the growing food and fuel debate will challenge the ethanol industry, along with questions about its environmental benefits and the controversial tax subsidy and tariff structure. He suggests there are other ethanol growing pains, but the federally mandated goal of 36 billion gallons by 2022 supports the corn ethanol market.
2) Exports and exchange rates. Export demand for corn is high, despite the volume going into ethanol refineries and its subsequent higher value. Both corn and soybean exports as well as wheat have grown dramatically, which Boehlje says is the result of strong economies in China and India and their purchasing power. Parallel to that has been the decline in the value of the dollar, and the Purdue economist says it will be important to watch personal income growth in Asia, food demand from Asia, and the currency relationships. While Boehlje says the low value of the dollar has bolstered US exports, it has increased the cost of imported products, such as fertilizer. And he believes the value of the dollar may be to blame for 50 to 60% of the increased cost of production.
3) Food vs. fuel debate. Food prices have increased globally because of higher energy and transportation costs, but critics have frequently stopped looking beyond higher commodity prices. Additionally, wheat shortages have been weather related, and some biofuels have consumed some of the commodities that were once only destined for food stores. But Boehlje says there is a real prospect for a reduction in the growth of animal protein consumption in developing countries, which had been an exciting development prior to the biofuel age. He says higher costs of corn and other feeds will stifle increased production of meat animals. Such a scenario is changing the food consumption patterns in developing countries because of reduced purchasing power. Boehlje says, “To put this issue in context, one must remember that the growth in demand for agricultural products prior to ethanol was not from the domestic food market, but from the export market; and the fastest growing agricultural exports were in fact the animal protein complex.”
4) Global production. Farmers around the world have access to the same production technology and capital markets available to the US farmer, but unlike other productive areas of the globe, land and water resources in the US are at capacity. While the US could produce more livestock, that industry is constrained by environmental regulations and social preferences. The US will face more global competition from lower cost producers, and from producers which can use technology to produce more crops and livestock.
5) Weather and wheat. Wheat has been a problem for world producers for several years because of short crops, but that will not continue says Boehlje, and he says many areas of the world can expand production with new technology and increased acreage. He says in a 3-4 year span, the global supply-demand scenario for wheat could reverse from its current position of 30 year lows in stocks, which would cause a dramatic decline in wheat prices. He urges farmers to watch wheat acreage, yield, and production, which will be encouraged by current prices.
Summary:
Crop production costs are rising from higher input costs, and commodity values could be impacted by a global recession, that will dampen food demand, commodity prices, and farm income. The agriculture industry is well positioned financially to weather an economic storm that would be felt at the farm level. Farmers should monitor the changing economic climate, to determine if we are in a new paradigm of perpetual prosperity for agriculture. The five factors will help determine the direction the trends will take and when a cyclical downturn will occur.