Braced for a downturn?

Commodity prices poised to fall | Economists say markets have peaked

Farmers who have enjoyed several years of high prices and improved incomes should be preparing for a significant decline in commodity prices and market returns, prominent agricultural economists warned last week.

And a price slump that will shave several dollars per bushel off current market returns is predicted to happen sooner rather than later.

“All commodity price booms historically end,” Scott Irwin from the University of Illinois told a national agricultural policy in Ottawa Jan. 12.

“What is significant about this one is how long it has lasted. But it too will end.”

Richard Gray of the University of Saskatchewan echoed the prediction at the second annual conference organized by the Canadian Agricultural Economics Society.

“When prices are high, there often is a tendency to assume it will last forever and farmers begin to make investment decisions based on that,” said Gray.

“If you look across many commodities, the historic pattern is many years of low prices followed by a few years of high prices followed by many years of low prices. I see no reason why that pattern won’t repeat.”

Irwin said U.S. corn prices now in the $6 per bushel range can be expected to fall to the $4 range within a few years, which is a drop of 33 percent.

“I don’t expect us to ever go back to the era of $2, but there will be a significant drop,” he said in an interview. “Wheat will follow, I predict, down from the $8 range to $5 or $6.”

The two economists said the end of the price boom is predictable because of industry reaction to higher prices and an end to growth in the biofuel industry’s demand for grain and oilseed crops as feedstock.

In the United States, the ethanol boom is ending as government incentives are scaled back, said Irwin.

“So on the demand side, I see a lot less pressure as we look over the next three to five years,” he said.

“I also have faith in the market system principle that if there is a boom in investment because of higher prices, particularly outside the United States in South America, Africa, Ukraine and Russia, we are just a couple of good weather years away for the impact of those investments to start to show up in supplies, which will put pressure on prices.”

In the corridors of the conference, which attracted economists and producers from across the country, there also was discussion about the impact that the end of the price boom could have on farm debt, already at record levels of more than $60 billion.

If higher income in recent years persuades farmers to expand or invest rather than pay down debt, the result could be more borrowing and a higher debt load to service even as market incomes drop.

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