In reviewing a paper he co-authored in 2007 about a new agricultural era for grain prices, Scott Irwin, chairman of agricultural marketing at the University of Illinois, says the past three years’ monthly average corn price of $3.57 shouldn’t raise flags that Illinois agriculture is stepping back to pre-ethanol boom prices.
The price boom caused by the expansion of the Renewable Fuel Standard in 2007 started a new era, he argued in the paper and reiterates today. He says 10-year monthly average prices will continue to reign higher than the last era, which started in 1973 and ended in 2006 — right before a massive uptick in corn prices. As prices have spiraled downward from those peaks, Irwin cautions optimism for growers who don’t see a floor.
“We’re still going to be in a new era; we’re not going back to $2.40,” he says. “$3.57 for corn represents us scraping along the bottom of the new-era price range.”
Nevertheless, Irwin says farmers are well into the second phase of the new era, where historically, prices will slowly creep downward following the phase 1 boom — supply outpaces demand. Still, he projects a monthly average corn price of $3.75 over the next decade.
“If you want to look out 15 years, that will be a little bit too high. Because the tendency is to grind lower. We will have high prices during certain time periods when we have weather problems like drought,” Irwin says.
Era lows are projected to reach the $2.90 end of the range for corn when supplies are high, but Corn Belt-wide droughts can be counted on to lower supplies and bring price relief about 1 in every 8 years, he says.
To project the price of soybeans over the next 10 years, his equations track the price of corn based on historical averages.
“If you use the long-range average soybean-corn price ratio of 2.4, just multiply that by 3.75. It comes out to $9-a-bushel average price for soybeans,” Irwin says, adding that when you average the past 10 years, the price estimate for soybeans written in the original 2007 paper is only a cent off — the 2018 corn estimate was off by 17 cents.
“That was phase 1. With phase 2, the average corn price is $3.75, not $4.60,” Irwin says, clarifying that the original 10-year average monthly price projection of $4.60 stated in his 2007 paper is too high looking at the next 10 years.
When asked about $7-per-bushel highs experienced by corn during the ethanol boom, and proportional highs in soybeans from China’s increased appetite, Irwin says, “Those highs are behind us for quite some time.”
Charting the eras
Irwin studies post-World War II agricultural eras closely to gain insights into the current era.
“It never happens exactly the same, but there really seems to be a pattern in the data we have. It was a much steeper grind lower in the ’50s and ’60s for prices than it was in the ’80s and ’90s, but it’s there in both eras,” Irwin says. His 10-year monthly average projection for corn would be somewhere around $3.35, not $3.75, were he not to account for possible drought.
“But I’m an optimist, and I believe in droughts,” he says.
Phase 2 of each of the other eras featured heavy political government price support for agriculture — not just through crop insurance, or Commodity Credit Corporation payments, that put a floor on prices, but also through government buying up surplus and ramping up setback land enrollment.
“The pattern of boom and slow grind down in nominal price levels appears to be holding into our current era, the new era. But the most striking difference is that, relative to the previous two eras, we’re operating without much of a safety net under market prices,” Irwin says.
While the 2018 Farm Bill increased the Conservation Reserve Program’s acreage cap to 28 million and increased CCC payments slightly, he says the changes pale in comparison to interventions made in the last two eras. CCC payments are too low compared to previous cycles, Irwin says.
“If we were operating in the same policy environment today that we were anytime between the late ’40s and the ’90s, the loan rate for corn would not be a little over $2. It would be something like $3.50 or $3.75,” he says, concluding a higher rate would help farmers get closer to recouping their losses on inputs.