Here’s an uncomfortable question: how much of those 2006-13 profits came from inadequate crop supplies and booming demand and how much from lofty oil, copper and other commodity prices?
The answer to that question hasn’t really mattered to growers for the past few years. It was just an academic concern.
However, it’s now a more pressing question because crop prices are down, as are almost all commodity prices.
If overall commodity prices stay down, how high can crop prices rise based only on their own supply and demand?
Read Also
Sask. ag group wants strychnine back
The Agricultural Producers Association of Saskatchewan has written to the federal government asking for emergency use of strychnine to control gophers
This has become a serious issue because many analysts believe the era of high commodity prices is past. I did a Google search on the subject of “the long-term commodity bull market” and got a flood of results.
Many heavyweight analytical firms back the “bull market is dead” idea and have done so for a couple of years.
As Ruchir Sharma of Morgan Stanley wrote in a commentary in May 2013: “Certainly, the world is no longer terrified of running out of important commodities.”
A year later, the bull market doesn’t seem to have any more life.
A stunning similarity leaps off the charts as I look at 25-year corn, soybean, canola, copper and crude oil futures prices.
There are differences in the slope and scale of individual peaks but extremely loud echoes.
For instance, spring wheat, canola, corn and soybeans peaked in 2008 and 2012, but wheat and canola peaked higher in 2008 than 2012, while corn and soybeans peaked higher in 2012.
So what does the loss of underlying commodity market strength, if that in fact remains the case, mean for the low, median and high prices of the crop market for the next few years?
As always, the markets aren’t making it easy for us to figure it out.
Students of the long-term commodity bull market, which began around 2000, will recall that crop prices took a few years to catch up with rising commodities such as copper and oil. Agricultural commodities initially seemed to have missed the boat.
Then prices took off in 2007-08, rising to unbelievable levels. Anyone remember the futures price peak of $24 per bushel spring wheat?
That was a year of damaged global production and projections for bottom-of-the-barrel ending stocks, which could be said to be the cause of the super-high prices.
However, it was also the year when oil futures prices hit record highs of more than $140 per barrel and copper hit an all-time high that lasted four years, until it peaked higher in 2012.
That rally coincided with the other great peak in crop prices, when the Midwest drought demolished yields and sent prices soaring again.
How do you disentangle the crop market peaks in 2008 and 2012 from the accompanying commodity complex peaks of those years?
How do you know what crop prices would have been in 2008 and 2012 if oil, copper and other commodities had been low?
This matters because if indeed the overall commodity bull market is dead, as so many analysts say, then farmers will need crop prices to rally independently of general, years-long commodity strength to get better long-term profitability.
Like many debates, this one has minimalists, maximalists and ones who think the question is a misunderstanding.
Minimalists say the behaviour of other commodity markets is almost irrelevant because ending stocks are 95 percent responsible for crop price moves.
Maximalists say overall commodity strength provides most of the underlying crop values, with weather and other supply-affecting elements providing only marginal changes in relative commodity-to-commodity values.
The ones who think the question is a misunderstanding argue that the commodity boom was caused by demand surging, falling and then surging again.
Every commodity roughly rose and fell together because people everywhere were demanding more of everything.
There’s lots of fodder here for agricultural economists to work on for decades, but farmers get to do their own research.
They’ll do that by simply living through the coming years and seeing what happens.
And that’s not an academic situation.
