Commodity, Input Prices May Level with Recovering Economy

December 17, 2009 06:00 PM

Unstable commodity and farm input prices since 2006 have put the agricultural sector on a roller coaster ride, but according to one Purdue University agricultural economist, those prices could level as the economy comes out of recession.

"In terms of overall returns for crop producers, the last three years have really been a turbulent time starting in the fall of 2006," said Chris Hurt. "Three years ago we saw major increases in crop prices that continued to escalate until the early summer of 2008.

Unfortunately, the cost of production also escalated, but it lagged the upward movement in crop prices, so this gave the 2007 and 2008 crops very strong margins for crop producers.

"After the peaks in 2008 crop prices began to drop, but input costs continued to rise. So it was the 2009 crop where most producers had the maximum investment cost. However, the 2009 crop prices did not stay as high."

While many producers felt the pinch of high input costs and lower grain prices, Hurt said there is good news coming for the 2010 crop year.

"For the 2010 crop we've seen some moderation to the downside in cost," he said. "That particularly will be the case for fertilizers and on-farm fuel costs. At this point, it appears that we're back fairly close to an equilibrium on the price of grains and the cost of production. Producers can expect better prospects for recovering costs and having reasonable crop returns."

Some of the drivers behind the sharp swings in commodity prices include biofuels demand, a weak U.S. dollar and a struggling, but slowly recovering, world economy.

"Strong world economic growth in 2007 and 2008 meant higher incomes and more demand for agricultural products, which drove grain prices higher," Hurt said. "Another big driver of those high prices was the new biofuels demand. And, on top of those, the weak U.S. dollar has meant foreign currencies bought a lot more, which drove up our export markets."

But, as major world economies began struggling in the spring of 2008, so did commodity prices.

"We saw a recession in the U.S., Europe and Japan-the major world economies," Hurt said. "Less economic activity means generally lower incomes and less purchasing, and that includes agricultural products."

It appears the U.S. economy hit bottom in the summer of 2009 and is now in a period of recovery, which is going to be an important factor for grain demand and prices in 2010, Hurt said.

"Recovery is going to be fairly slow," he said. "Since a recession means our economic activity dropped, recovery simply means we're starting from a low level. It does not mean we are back to business as usual."
This news release was provided by Purdue University.

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