MOUNT VERNON, Ill. — Scott Irwin has been looking at grain prices in a historical context that may provide some idea of where they’ll go in the future.
Work by the University of Illinois ag economist and his former colleague, retired professor Darrel Good, put prices in perspective over the years. According to their findings, we are in the third long-term price era since 1947.
The first era ran from 1947 through 1972, with corn prices averaging $1.28 (not adjusted for inflation). In the second, which ran from 1973 through 2006, prices averaged $2.43. We are only a bit more than a decade into the current era — the third — but Irwin said he believes history will repeat itself.
“The 12 years of the new era actually has two very distinct price periods,” he said. “The average for the first eight years was $4.90. That’s hard to imagine: For eight years it was $4.90. Over the past four years, the average price in Illinois has been $3.57. That’s a huge stepdown.”
Soybeans have followed a similar path, averaging $11.73 per bushel the first eight years and dropping to $9.73 the past four years.
“The price for Era 2 increased 90 percent over the price in Era 1,” Irwin said. “We said the same thing between Era 2 and Era 3. We made a forecast of $4.60 per bushel for the new era that was developing in 2007-08.”
The economists placed a cause and effect for each era that resulted in a boom and slowdown of grain prices. Each is characterized by a “demand shock” that drives prices and production upward, followed by a slowing of demand and subsequent falling of grain prices.
The first era, beginning in 1947, was triggered by a boom following implementation of the Marshall Plan to feed Europe following World War II. The other factor was the Korean War.
The second era began in 1973 with the grain export and oil price boom. In the third era, beginning in 2006, prices soared following the growth of ethanol production.
In each case, the booms were succeeded by grain production outpacing demand. But in each era, prices remained at a higher level than the previous period, even after falling from the highs.
Irwin said grain prices are not likely now to fall as low as they were in either of the previous two eras. On the other hand, it is less likely farmers will receive the same level of government help as in the past.
“In the late ’40s and early ’50s, we increased loan rates. We did everything we could to form a safety net,” he said. “We got loan rates very high — much higher than market rates in the ’50s. There are still some of the bins around that were built in that period.
“In the late ’50s and early 1960s, we started taking land out of production. We started supply management with the Conservation Reserve Program and annual set-aside programs.
“The message is, there was massive government intervention that kept these prices from going even lower under the tremendous forces of productivity that were going on post-World War II.”
In today’s political climate, such aggressive government intervention is not on the horizon. The programs in place don’t replace so much of the lost earnings from falling prices.
“Era 3 could be much different because we’re going to be operating with a much lower safety net compared to those previous two eras,” Irwin said. “The loan rate (for corn) was just raised to $2.20. That’s not going to make a difference. Notice how different that is than what happened in the previous two eras. We would be jacking up the loan rate to $3.70 or $4 if we were following the same government response as we had in the previous two eras.”
Instead, farmers may have to rely on the great agricultural equalizer: Mother Nature.
“When we get bad weather, we are going to get some good prices,” Irwin said. “It will happen again.”