By Daryll Ray

Over the last year as corn prices, followed by those of soybeans and wheat, have risen to levels only dreamed of a couple of years ago, we have increasingly heard discussion about farm commodity prices reaching a new plateau. A recent article by Wall Street Journal reporter Scott Kilman captures this perspective with the title, "The days of cheap grain are gone, according to agriculture experts."

In that article Kilman quotes Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern, as saying, "The days of cheap grain are gone." Kilman goes on to write, "In the past…increases have been caused by temporary supply disruptions. After a poor harvest, farmers would rush to capitalize on higher crop prices by planting more of that crop the next season, sending prices back down. But the current rally, which started a year ago in the corn-futures trading pit at the Chicago Board of Trade, is different."
Kilman offers three pieces of evidence in support of the "new plateau" thesis. The first piece of evidence is the spread of the price increase beyond corn to other commodities and the fact that it has lasted for more than a year. The second piece of evidence is no surprise to anyone: the increased demand for corn as the primary input for ethanol production supported by government incentives.

The growing middle class in Asia and Latin America constitutes the third piece of evidence. The expectation is that a growing middle class in these areas will shift from a grain based diet to one that includes more milk and meat which will result in the need for increasing amounts of grains and seeds as feed ingredients. It is implicitly expected that the US will benefit from this rapid rise in demand for bulk commodities like corn and soybeans.

In these arguments, Kilman’s article matches the arguments we have heard from many quarters including farmers, members of farm commodity groups, legislative aides, and farm reporters.

Kilman notes one of the reasons why many want to believe in a "new plateau" when he writes, "The prospect of a long boom is riveting economists because the declining real price of grain has long been one of the unsung forces behind the development of the global economy. Thanks to steadily improving seeds, synthetic fertilizer and more powerful farm equipment, the productivity of farmers in the West and Asia has stayed so far ahead of population growth that corn prices dropped 75 percent and wheat 69 percent, adjusted for inflation, since 1974."

Do the current prices represent a "new plateau" or just a temporary peak that will be followed by a downhill return to the level we have seen for the last three decades? I am not prepared to provide a definitive answer to that question. As I see it, the jury is still out.
Part of the answer will depend upon answers to a number of other questions.

Question number one: How quickly will we see a break-through in the cellulosic production of ethanol that displaces large amounts of corn as the primary ethanol feedstock?

The second question: Will crude oil prices stay at the same level or increase for the foreseeable future, or will they fall?

The third question: How quickly can the ethanol industry solve the current logistic problems that make it difficult to get ethanol from the Grain-Belt plants to distant seaboard markets?

The fourth question: To what extent will farmers in countries like Brazil and Argentina respond to the current high prices?

Question number five: Will developing countries like China choose to feed their growing middle class with imported food stuffs or will they choose to produce them themselves?

Question number six: Do the current world-wide-weather-based crop-yield problems we have seen this year represent a pattern that will be common over the next decade or two?

I want to see the answer to these questions before I am ready to declare that we have entered upon a new plateau in crop prices.