 According to John Fulton, county director for University of Illinois
Extension, there were likely several factors that went into the
price changes prior to 2006."Use in fuel blends (ethanol and
biodiesel), food products, exports and domestic livestock feeds are
the large consumption areas," Fulton said. "The export markets are
usually only two or three years in length, and the last boom was in
the late ’70s, and the steep price decline led to significantly
smaller incomes for producers."
Beginning in late 2006, crop prices entered what some called a
"new era" of higher values, partially due to the increased demand
for crops in the production of ethanol and other similar biofuels.
Fulton says that the fuel blending led to an increased use of
domestic crops by U.S. producers, whereas past years saw a greater
trend in exporting crops.
After the growing season of 2013, many farmers were happy to find
a much larger yield than they had in the past. Last summer,
projected corn prices hovered at around $7 a bushel. By all
accounts, there was the potential for a great profit this year.
As 2013 moved forward, the projected price of corn dropped
considerably. As of February this year, corn prices in Illinois have
been hovering somewhere between $4 and $4.50, depending on where you
look.
The question that has arisen for farmers now is this: How do I
recover? What do I do now? The answer given by agricultural experts
is to try to break even this year.
According to Gary Schnitkey of the University of Illinois
Agricultural Department, cash grain bids for 2013 fall delivery are
$4.40 per bushel. This is below the projected 2013 break-even level
of $4.65 per bushel. Cash bids for 2014 fall delivery are near $4.35
per bushel, near the $4.31 level needed to break even. However, the
potential for low prices to continue over the next few years could
lead to losses.
The break-even rate has steadily increased since 2004. At that
time, break-even prices averaged $1.67 per bushel. Between 2004 and
2013, break-even prices increased each year: $1.98 in 2005, $2.40 in
2006, $2.54 in 2007, $2.88 in 2008, $3.59 in 2009, $3.69 in 2010,
$4.18 in 2012, $4.19 in 2012 and $4.65 in 2013. The increase in this
dollar amount can be attributed to both increased non-land costs and
increased cash rent.
According to data provided by the University of Illinois, this
era of pricing has been marked by an interesting pattern. Corn and
soybean prices have likely finished what have been, by historical
standards, very long runs of above-average prices. In addition, it
is unlikely that such prices will return in the near future.
However, the same data shows that it is also atypical for a long run
of above-average prices to be followed by a long run of
below-average prices. It is more likely that any resulting trend of
low prices will be shorter than the preceding trend of high prices.
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Some believe that the high corn prices since 2006 have
stimulated an increase in foreign corn production. The USDA
estimates the 2013 foreign production of corn to be 46 percent
larger than production in 2006. Based on historical data, corn
acreage outside the United States may stabilize following the
recent decline in prices, but a substantial reduction in acreage
would not be expected. In order for that to happen, foreign
markets would have to witness a combination of poor weather and
lower yields. A small increase in domestic demand for corn could
also be generated by an expansion in broiler and hog production.
The most common reason for potentially higher corn prices next
year is the expectation that U.S. producers will trim acreage and
production in response to the decline in corn prices.
Overall, it is very likely that the next couple of years will see
a decrease in corn prices, with some farmers simply trying to break
even. However, all is not lost, and if history does indeed repeat
itself, we will likely see another increase in prices, even if the
levels are not as high as in recent years.
"There will probably be some cushion, and there already has been
in the market we are seeing now," says Fulton.
Any higher corn prices next year and beyond would likely come
from a combination of reduced foreign production, smaller U.S. crops
and an increased demand for corn. Increased demand, however, does
not equate with an increase in consumption associated with lower
prices. Increased demand is defined as the willingness of users to
consume more corn at a given price, or conversely, to pay higher
prices.
Overall, while there may be a few difficult years ahead, it will
be a relatively brief moment of financial strain. A run of low
prices may very well lead into another period of high prices. The
downside is the low likelihood that we will see several years of
corn prices at $6 a bushel or higher, as we witnessed in past years
in Illinois.
[By DEREK HURLEY]
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