Volatile Markets Are New Reality in Agriculture
Domestic ethanol demand and a growing global population with an increasingly Westernized diet drove unprecedented farm commodity prices in 2010, a trend economists think is unlikely to shift this marketing year.
With $6 corn and $13 soybeans, farmers across the Corn Belt question the sustainability of 2010’s record prices. “Anytime we have high prices, there will be a convergence of events responsible,” said Matt Roberts, professor of agricultural economics at The Ohio State University. “That’s what we saw in 2008 and that’s what we see again now.”
Roberts said current values for corn and soybeans stem from exceptional domestic and international demand. For corn, that demand is ethanol driven. “The background is high oil prices,” Roberts said. “With the size of the biofuel industry, when oil prices flirt with $100 per barrel we’re going to see that reflected in the price of corn.”
Higher prices for oil push the price of gasoline, “and that makes ethanol a more attractive fuel for blenders,” Roberts said. “It bids up that price, and we see it come through in corn.”
Purdue University agricultural economist Chris Hurt concurs. “In 2005, it took 7.4 million acres of corn to satisfy the demand for ethanol in the U.S.,” Hurt said. That acreage climbed dramatically, “pushing up to 21 million acres in 2010.”
Likewise, global demand for feed grains and oilseeds means increased price strength. “When we look around the world we see strong feed demand, especially in China, for soybean meal and corn,” Roberts said. That appetite for feedstuffs comes from growing consumer desire for meat, milk and eggs in developing countries.
Ohio State alumnus Kevin Adams, president of grain merchant and transporter CGB Enterprises, sees this demand first-hand. “The countries in the Asian marketplace, especially China, are looking outside their borders for a reliable source of feed grains,” Adams said. “In today’s market, the U.S. is the most reliable source.”
Purdue’s Hurt also sees China as a major driver of U.S. soybean demand. “In 2005, the acreage needed to supply China’s demand was 8.3 million acres,” Hurt said. “In 2010, we’re projecting that’s going to take 20 million acres. That’s a 12 million acre increase in the amount of beans required just to go to China.”
Along with demand factors, weather hampered production in the Southern hemisphere in 2010. “Around the world we saw wetness in Argentina and flooding in Australia affect crops,” Roberts said. “We saw large droughts last year adversely affect former Soviet countries’ production.”
Weather woes mean fewer bushels available to market. “We’ve seen both a reduction of supply and an increase in demand,” Roberts said, “and the question about what’s sustainable, or is this a bubble, really boils down to those two drivers.”
Roberts’ bubble question greatly concerns agribusiness. CGB’s Adams, for example, is unconvinced high prices are the new normal. “I would caution farmers out there not to bank on these price levels as they make investment decisions on land or equipment,” Adams said. “It’s great right now, but I’m skeptical if it will last.”
Asked what might damper seemingly irrepressible corn and soybean prices, Adams said farmers should expect the unexpected. “I’m a believer in black swan events, something that will occur that no one expects,” Adams said. “It happens, and when it does the markets take a tumble. We all need to be prepared and very cautious about these high prices.”