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Stagflation and grain prices

Agriculture.com Staff 02/06/2016 @ 5:37am

There is a lot of talk, including some on the "Marketing" talk page, about the condition popularly called "stagflation".

If it comes to pass, farmers wonder what the effect of this will be on grain prices and the farm economy in general. My last economics class was exactly fifty years ago so my knowledge of the financial system is a bit rusty. However, my memory of the 1970's is pretty sharp because I was 30 years old in 1970 and was just beginning my farming career. There are some things that are just hard to forget!

Some market watchers are predicting that the current financial situation will result in a period of stagflation similar to thirty years ago. Looking back at what happened then might give us some idea of what is ahead. There is always a need for caution when using the past to predict the future because the factors are not exactly the same. The end result could be completely different.

Looking back at long term grain market charts shows prices shifted dramatically higher in 1972 and 1973. This was caused by underlying economic conditions rather than by poor crops. The great Russian grain purchase was an important trigger. A neighbor who sold his soybean crop at harvest in 1972 for $3 thought he had the world by the tail. By the time I got mine harvested, in December, the price was $4. By the following spring cash beans were over $10.

It is easy to draw a parallel between the big shift in prices back then and what happened in 2007 and early 2008. The recent similar price appreciation was based on the weakening dollar and bio fuels. If the economy now goes into stagflation as it did back then, the old charts of grain prices should be an indicator of what is ahead.

Both soybeans and corn made historic price peaks in the summer of 1973. In the next 15 years, corn futures had four price peaks over $3.50 and soybean futures made five price peaks over $9.00. None of these exceeded the peak of the summer of 1973. All but the soybean price rally in 1977 were caused by droughts in 1974, 1980, 1983 and 1988. The price of corn did not exceed the 1973 peak until the summer of 1996. Soybeans did not exceed the 1973 price until this year.

Bad economic conditions did not seem to cause a big break in grain prices. Soybean futures prices never did go back under the old plateau of $4 per bushel. Cash prices were under $4 briefly in the winter of 2002. Corn futures prices challenged the old plateau of $1.50 briefly in the winter of 1986-1987. One local land owner sold some corn in December 1986 for $1.16! Those low prices did not last long.

I remember the 1970's well. Things were tough on the Smith farm. While much of agriculture was enjoying the best years ever, my area suffered from four years of extreme drought. I struggled to keep afloat supporting two children and all of the financial burdens associated with beginning a farm business. The conservative values developed by those who survived served us well when the bottom eventually fell out of the agricultural economy.

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