What goes around comes around, even with commodity prices.
Prices climb unusually high and then drop quickly about every 30 years, said Chris Hurt, a Purdue University agricultural economist. The price spikes often are brought on by wars and currency devaluation - unexpected events that are difficult to predict, he said.
The 2007 high price filled many in the agricultural industry with optimism that demand for crops will continue to exceed supply and farmland values can only keep rising. History teaches otherwise, however, he said.
"Those bullish arguments have been made at least three other times in the last 100 years," Hurt said. "Each of those price spike events was driven by events that caused a surge in demand. But each time those factors did not last."
Price spikes in 1917 and 1947 were tied to European food shortages caused by World Wars I and II and by the increased demand for U.S. grains, Hurt said. Corn prices (adjusted to 2010 dollars) peaked at $3.89 a bushel in 1917 and $4.50 in 1947, and dipped to $1 in 1920 and $2.62 in 1948.
In the 1970s a struggling U.S. dollar and a significant increase in commodities buying by the former Soviet Union sent corn prices skyrocketing from $3 a bushel in 1971 to $7.28 in 1974, Hurt said. By 1977 corn was selling for $4 a bushel in 2010 dollars.
The 2007/2008 price spike was the result of demand growth for grains caused by a weak dollar, the rapid growth of biofuels and strong world income expansion. Similar price cycles can be tracked for other commodities, as well, Hurt said.
It might be coincidence that price spike cycles have happened about every 30 years in the past century, Hurt said, "or, there may be reasonable supply and demand explanations.” Regardless, there are lessons for farmers.
"First, it doesn't take long to draw land into production, as we've seen with very high prices, or to apply a huge amount of intensive technology to get those yields up very quickly. But it's harder to reverse and go back to using old technology once we bring new technology or new lands into production. This may be why in the post-price spike period we've tended to get that longer period where our supplies have exceeded demand, and this means long periods of relatively low prices and very tight margins."
Producers also should understand that many factors can contribute to price spikes, including farmland markets, the growth of developing countries and biofuels production, Hurt said.
"How overall supply and demand evolve will determine prices in the future," he said. "The examples from the past tell us to be cautious now that we may be in the post-spike period," he said. "As in those past cycles, we're not in an opportune time to be making major investments in land. Not to say do or don't buy farmland aggressively, but at least know the cautions that are out there."
Source: Purdue University