What is in this article?:
- Exceptionally high prices are nice, but they usually worsen future low-price problems
- South America factor
- High prices for corn and soybeans may turn out to be a mixed blessing.
- The impact of high prices extends well beyond the current year.
- Current prices give Brazilian farmers every incentive to sharply increase acres.
The high prices being fetched this year for corn and soybeans may turn out to be a mixed blessing for crop farmers.
For those with a crop to sell or adequate insurance, the high prices will virtually guarantee that they make a healthy profit. For those who went light on insurance this year and have little to harvest, the high prices will bring little consolation.
But we need to remember that the impact of high prices extends well beyond the current year. High prices send a signal to the market that more production is needed in the future. When the high prices result in a sizeable shift in demand, then the signal will result in an increase in production needed to meet this new demand level.
In fact, that is exactly what we saw in 2007 as the U.S. corn market struggled to meet the rapid increase in the amount of corn going into ethanol production. The price went up in anticipation of this shift in demand and farmers responded, dramatically increasing the number of acres put into corn production.
But it is another thing altogether if the high-price spike is amplified by a one-year weather aberration. The planted corn acreage this year was large enough to send prices downward before the rains shut off at the beginning of summer, while the increase in the price of corn did nothing to increase rainfall.
However, the price increase did send a signal to farmers around the world who want to cash in on today’s lucrative corn and soybean prices. To a person, they are hoping that they can get a crop in the bin while prices remain high.
And that would not be a problem if the U.S. has another drought next year, and the year after. But add a bountiful U.S. crop, like the one expected this year, to the increase in production elsewhere and it could be “Katie bar the door.”
If this were only a discussion of economic theory, there would be nothing for U.S. crop farmers to worry about.