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New crop price plateau?

Are this year's $6- and $7-per-bushel corn and double-digit-dollar soybean prices too good to be true?

“We were at $3.80 (per bushel) corn not that long ago,” says Brent Gloy, Purdue University agricultural economist. “From there to over $7 cash corn at times this year represents unprecedented swings. I never thought we would see $3-per-bushel swings without a major disaster.”

These higher levels may last longer, Scott Irwin, University of Illinois (U of I) agricultural economist, thinks crop prices are on a new plateau. There's lots of room for volatility in all this. Still, Irwin and fellow U of I agricultural economist Darrel Good first predicted a new price plateau for corn, soybeans, and wheat back in 2008 and 2009, and they're sticking to it. Irwin talked about it at last summer's Top Crop Farmer Workshop at Purdue University.

New plateaus rarely happen. The last one occurred in the 1970s, when prices leaped due to factors including surging demand from the then Soviet Union.

Back in 2008 and 2009, Irwin and Good stated that a new plateau began in January 2007. Back then, they predicted these average Illinois crop prices:

● $4.60 per bushel for corn.

● $10.58 per bushel for soybeans.

● $5.80 per bushel for wheat.

So how did they do? Here are the actual average monthly prices from January 2007 to February 2011 in Illinois:

● $3.99 per bushel for corn.

● $10.09 for soybeans.

● $5.36 per bushel for wheat.

Although those prices came in under predictions, Good and Irwin say the numbers are still in the ballpark. And it confirms their belief that we're in a new era for prices.

Three eras

The U of I economists split price plateaus into three eras:

1. January 1947 to December 1972. During this time, average monthly Illinois per-bushel prices were $1.28 for corn, $2.63 for soybeans, and $1.77 for wheat.

2. January 1973 to September 2006. During this time, average monthly Illinois per-bushel prices were $2.42 for corn, $6.15 for soybeans, and $3.24 for wheat.

3. January 2007 began the third era.

The biofuel boom is helping to drive today's price plateau.

“That's occurred primarily in the U.S. on the ethanol side, but it's also had an important impact on the vegetable oil side for biodiesel requirements in the EU, Brazil, and Argentina,” says Irwin. “When you put those together with another market component of very high crude oil prices, you have an explosive situation. We think this is a big game changer that is moving us to a higher level.”

This is also coupled with emerging market growth in China and India. China and India have 37% of the world's population with 2.3 to 2.4 billion people.

“Every agricultural industry person has said we have to ramp up agriculture if we have 2 billion more mouths (from today's 7 billion) to feed by 2045,” says Mike Boehlje, Purdue University agricultural economist.

That's only true, though, if those countries have money to buy food, says Boehlje. So far, the rapidly growing economies of emerging nations like China have helped spur surging demand for U.S. crops and livestock.

How they got there

Irwin and Good projected prices for the era starting in 2007 by looking at price distribution levels of previous eras and assuming the percentage jump between the first and second eras would mimic the percentage jump between the second and third eras.

Expect wide swings, though. Ranges for Illinois prices will likely be between:

● $3 to $6.70 per bushel for corn.

● $7.51 to $17.56 per bushel for soybeans.

● $3.30 to $10.15 per bushel for wheat.

How should you play it?

One guideline that can help you in planning budgets is determining how much time prices will spend at each level.

Irwin and Good took distribution patterns from the previous two eras and applied them to the third era. Following are their results:

Corn: For 18% of the time, projections are for prices to hover above $5 per bushel; 10% of the time, prices are projected to be $3.50 or lower. Projections are for prices to be between $3.50 and $5 per bushel the rest of the time.

Soybeans: Prices are projected to spend 18% of the time at $12.50+ per-bushel levels; 15% of the time, prices are slated to be below $9 per bushel. Prices will hover between $9 and $12.50 per bushel the rest of the time.

Wheat: While prices will hover below $4.25 per bushel 18% of the time, they're expected to be $7 per bushel and higher 14% of the time. For the remainder of the time, they'll be between $4.25 and $7 per bushel.

Prices in the last year have been in high ranges of this new plateau. “If we are right, these prices represent good marketing opportunities, says Irwin. ●

So what could go wrong?

Here are three clouds to toss upon agriculture's sunny-side-up outlook.

● The livestock industry is shrinking. “This is an issue you need to worry about,” says Mike Boehlje, Purdue University agricultural economist.

Some is due to an increased regulatory environment, such as difficulties in getting permits to expand. “Some think the livestock industry is being pushed offshore,” says Boehlje.

Economics has played a role, though. The recession shrunk it 5% to 7%, he adds. A double-dip recession would likely shrink it another 3% to 4%.

Spiking grain prices have also played a role. “Our livestock industry is fundamentally built on cheap feed,” says Boehlje. “That's gone, probably permanently.”

● Economic troubles for China would hurt U.S. agriculture. Exports to nations like China are the reason U.S. agriculture has (so far) resisted the recession. Bear in mind, though, that foreign economies can also slow down.

“If China has an economic slowdown, it would be disastrous for agriculture,” he says.

● Government policy is changing. Due to higher commodity prices, federal mechanisms like direct payments and loan rates play a much smaller role than they used to. Today's important factors include federal biofuel support and crop insurance.

“Take those away and direct payments and loan rates will matter again,” Boehlje says.

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