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High Commodity Prices Continue in Light of Report

by 5m Editor
1 April 2011, at 8:43am

US - High commodity prices appear to be here to stay indefinitely despite a US Department of Agriculture report issued yesterday that projects increased US corn acreage this year, said a Purdue University agricultural economist.

The Prospective Plantings report projects that corn farmers will plant more corn acres and fewer soybeans. Corinne Alexander said the report, coupled with lower-than-expected US grain inventories, offers little hope for relief from high commodity prices.

"US grain stocks, or inventories, are very tight, and whether that is because of lower production or higher use, we don't know yet," Professor Alexander said. "What we do know is that we need to have at least an average crop production year in 2011 to keep up with the current rate of use."

Professor Alexander and Chris Hurt, another Purdue agricultural economist, will present a free live webinar from 7-8:30 p.m. EDT Thursday (31 March) to update US farmers on the report – what it means for US and world grain markets and likely effects on prices. They also will offer strategies for pricing crops and capturing revenue offered by the markets.

The report, issued annually and based on farmer surveys nationwide, projects a 5 per cent increase in corn acres, at 92.2 million acres, and a 1 per cent decrease in soybean acres, at 76.6 million acres.

At those projections, even with average yields commodity prices are unlikely to decrease because of the tight world grain inventories. Any price relief would have to come in the form of an above-average yield; even still, Professor Alexander said the price relief would be marginal.

If yields were abnormally poor, commodity prices would increase to the point of rationing use, she said.

"In the event of poor crop yields in 2011, prices would have to increase enough to reduce usage by 1 billion bushels for corn and 200 million bushels for soybeans," Professor Alexander said. "That would mean an average-crop-year corn price of $7.50 per bushel and $14.75 per bushel for soybeans."

Higher grain prices mean higher consumer food costs and high feed costs for livestock producers.

"Feed is the biggest cost for livestock producers," Professor Hurt said. "If grain prices continue upward, there could come a point when many livestock producers would start to liquidate."

With current market livestock prices, some producers can afford up to $8 per bushel on corn. Anything higher would be enough to drive many operations toward financial losses.

Although high grain prices initially seem to benefit growers, Alexander cautioned that prices high enough to induce rationing eventually could lead to lower demand and lower prices.

"If we end up in a rationing scenario, it could lead to demand destruction for grain producers," Professor Alexander said. "Herd liquidations could ultimately translate into lower crop demand in subsequent years, which could reduce grain prices."

Information for the Prospective Plantings report is gathered in early March, so Professor Hurt cautioned that in any given year the difference between what farmers tell the USDA they intend to plant and what they actually plant can shift.

"If we get into a situation where planting is delayed and farmers are unable to get corn planted early enough, many will switch those acres to soybeans," he said. "Some producers may also change their minds on what to plant based on what commodity markets are doing."

Twenty-four Purdue Extension County offices will serve as host sites for the webinar. To find a local host county, please click here and click the nearby counties on the Indiana map.