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New crop price plateau?

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

Maybe, but they aren’t a flash in the pan either. Scott
Irwin, University of Illinois (U of I) agricultural economist, thinks crop
prices are on a new plateau. Irwin spoke this week to farmers attending the Top
Farmer Crop Workshop at Purdue University.

Granted, 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, soybean, and wheat back in 2008 and
2009 and are sticking to it.

New plateaus rarely occur. The last one occurred in the
early 1970s, when crop prices leaped due to factors including surging demand
from the then-Soviet Union. There was talk of a new plateau in the mid-1990s,
when corn prices surged past $5 per bushel before backing steeply down later in
the decade.

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

* $4.60 per bushel for corn.

* $
10.58 per bushel for soybeans.

* $5.80 per bushel for wheat.

So how did they do? Average
monthly prices from January 2007 to February 2011 in Illinois actually were:

* $3.99 per bushel for corn.

* $10.09 for soybeans

* $5.36 per bushel for wheat.

Although that came in under
predictions, the duo says it’s still in the ballpark. And, it confirms their
belief we are in a new era for prices.


Three eras

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

·     

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.

·     

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.

·     

The third one beginning in January 2007.

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 also been 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 big game changer that is
moving us to 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. By itself, that isn’t a game changer.

“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 they have money to buy food,
says Boehlje. So far, the rapidly growing economies of emerging nations like
China has 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 second and third eras.

There
will also be wide swings in volatility in this new plateau. Ranges for Illinois
prices will likely be:  

·     
Between $3 and $6.70 per bushel
for corn.

·     
Between $7.51 and $17.56 per
bushel for soybeans.

·     
Between $3.30 and $10.15 per
bushel for wheat


So 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.


* Corn

Eighteen percent of the time, projections are for prices to hover above $5 per
bushel. Ten percent 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-plus bushel levels. Fifteen percent 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

Prices will hover below $4.25 per bushel 18% of the time.
Fourteen percent of the time, prices are expected to be $7 per bushel and
above, with the remainder of the time being between $4.25 and $7 per bushel.

 

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