Producers and ranchers take notice: Corn prices are about to settle back down.
In a wide-ranging mid-July conversation with Farm Press, Pat Westhoff, director of the Food and Agricultural Policy Research Institute at the University of Missouri, said he wouldn’t “paint an overly pessimistic picture of the future outlook. The corn price is certainly much higher than we’ve had in the past – just not as high as in the last couple of years.”
Westhoff, who recently spoke at a Kansas City Federal Reserve forum on global agriculture, told the crowd “that a lot of people are bit too willing to assume that (prices) can only go up from here, that a rising population and other factors mean that prices will continue to go up and up.
“I don’t think that’s at all a safe assumption. If we were to have a larger than expected crop this year, or some other year, we could see a pretty serious downtown in prices.”
While world population continues to rise to an estimated 9 billion by 2050, Westhoff said predictions show the number of people added to the world population each year “is expected to decline.” Based on U.S. Census Bureau estimates, “the number of people added to the world's population averaged about 77 million people per year between 2000 and 2010, and we are projected to add about 76 million per year this decade. That drops to 69 million per year in the 2020s and 48 million per year by the 2040s.”
The common belief is that projected population growth itself creates some unprecedented challenge. In fact, “population growth will probably decline in importance as a driver of future demand growth as population growth rates continue to decline around the world.
“The real difficult questions are how much per-capita consumption will change in the future, and whether productivity growth will continue at the current rate, speed up or slow down.
“To oversimplify a bit, if per-capita consumption levels off but productivity continues to grow at the current pace or even faster, then we should expect lower prices in the future; if per-capita consumption grows rapidly (with income growth and/or biofuel demand) and productivity growth slows, then we should expect higher prices.”
Another commonly held belief is that the world’s available farmland is all currently in production. Not so.
“There’s additional land which could come into production,” said Westhoff. “We’ve seen a big increase in the overall amount of land used for producing the four major crops over the last 10 years. That’s led to a pretty astounding increase on a global basis.
Part of the increase occurs because USDA statistics count double-crop acres. “Get two crops off the same acre, that’s even more production.
“That’s happening not just (in the United States) but in China, Brazil and India. I was rather surprised when looking at the numbers that the largest increase in reported acres harvested is actually in India. That isn’t because they’ve found more dirt to farm but because they’re doing a much better job of double-cropping and managing their crops.
“Going forward, Ukraine is a place where there has already been some growth and there could be more. The same is true in Russia, where there is land that was in crop production in the past and could come back in with incentives like higher prices and favorable government policies.”
Don’t forget Africa.
“Nations in southern Africa are also poised to bring increase acreage if the political situation were to improve.
“Unless there’s some new driver for demand out there that we don’t currently know about, it isn’t obvious to me that we need to bring in lots and lots of additional land for the next 10, 20, or 30 years. Just ordinary yield growth – if it continues at the recent pace – might be able to accommodate a lot of the demand increase we’re likely to see.”
Farmland values, ethanol
So, what is Westhoff’s take on farmland values in the United States? Is there really a bubble that some are worried is set to pop?
“It’s not just all speculation. We have, indeed, had very strong fundamentals in recent years. There have been very good returns to crop production along with low interest rates. That combination has made cropland worth a lot more than it would’ve been worth 10 years ago.
“But it does raise the question of what happens if and when crop prices come back down and interest rates go back up?
“I know there are people out there who are firm believers that there has been too much of a price run-up in too short of a time in ways that are not generally justified.”
At the Kansas City forum, “this was discussed a fair amount. One of the speakers, Michael Swanson (a senior vice president and consultant with Wells Fargo), talked about this and one of his points was that even if there are arguments for why land prices have come up, we’re not seeing people being as discerning as they should be. Lower-quality land is perhaps being sold for more than it should be relative to good-quality land.
“One of (Swanson’s) arguments is that people should perhaps put more money into improving the quality of their land instead of buying more land -- tiling, irrigation and the like to make the land more productive. That would provide a better return on investment in the future instead of simply buying more land.”
Another of Westhoff’s points is that the future rate of growth depends on public and private investments. Has he looked at that in terms of research funding in the farm bills passed by the Senate and House?
“The farm bill itself doesn’t provide a lot of money for research. The actual money for USDA research comes from annual appropriations bills. The farm bill does set the rules of the road for those appropriations.
“There have been concerns with the annual appropriations. We haven’t seen the increase in public funding (of agriculture research) that a lot of people like to see. That’s why there are many folks concerned about what future productivity will be in the United States and elsewhere.
“There has been an increase in private sector research. But a lot of people are concerned about public sector funding be maintained to ensure that all portions of agriculture receive the support needed to develop future productivity.”
If the price of corn drops to, say, $3, how would the ethanol market respond?
“For domestic consumption, the real question is whether we’ll be able to satisfy the RFS (Renewable Fuel Standard) in 2014.
“And look at the value of a RIN – the certificate required to show compliance with RFS. After the last couple of weeks, the value has been about $1.35 per gallon. That implies we are being forced to discount ethanol sharply to try and get anyone to buy a blend higher than 10 percent. Trying to change that in the near-term is very difficult because of the lack of flex-fuel cars and E-15 or E-85 pumps.
“A question that’s been below the radar screen so far is: if corn prices come down sharply, will there be a big increase in ethanol exports? We were a net exporter of ethanol for several years recently. Those exports were rather significant until the drought hit. That could happen again in 2014, although I don’t see us exporting billions and billions of gallons.”