As laughable as it may be to farmers, those unfamiliar with nature of major-crop markets may be led to believe that farm-level crop prices are somehow cost-plus determined. Over a series of production periods, there is an element of truth to the assertion that increases in input costs can be reflected in crop prices via farmers’ collective decision to reduce production over time, or a policy change that is put into place to reflect increases in production costs.

But neither of those considerations is relevant right now. With the “high” crop prices of late, farmers are looking for ways to increase production despite higher input prices.

As we look to the future, however, we are concerned that the higher market prices we currently experience will result in an overinvestment in agricultural production. Farmers in the major exporting countries seeing the higher prices will bring additional acreage into production. To the extent that the resulting increase in production is not matched by increasing demand, prices will fall. And they can fall faster than they increased.

Prices earlier this year were falling until it became apparent that the U.S. corn crop was not going to live up to the expectations generated by excellent planting weather. As of now, the projected low level of ending corn and soybean stocks for the 2010 crop year, and short-term demand prospects, likely mean that 2011 will be a “good price year” for corn and for major-crop farmers in general.

We should be concerned about the years that follow. We are just an additional “high-production” crop year away, here and abroad, from prices that could plummet to LDP levels, barring a rerun of a 4 billion bushel cumulative increase in demand from somewhere.

As we look forward to the 2012 Farm Bill, we need to remind those involved in writing it that any farm policy will work well in a period of profitable prices. What we need to be concerned about is how well a proposed farm policy will work during those extended periods when total production costs, on even the most efficient farms, exceed farmgate prices.

Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural Policy, Institute of Agriculture, University of Tennessee, and is the Director of UT’s Agricultural Policy Analysis Center (APAC). Harwood D. Schaffer is a Research Assistant Professor at APAC. (865) 974-7407begin_of_the_skype_highlightingend_of_the_skype_highlighting; Fax: (865) 974-7298; dray@utk.edu  and hdschaffer@utk.edu; http://www.agpolicy.org.