Proof Commodity Price Bubble Has Burst

March 24, 2015 12:00 PM
Proof Commodity Price Bubble Has Burst

As commodity prices soared in recent years, headlines held dire warnings agricultural production could not feed 9 billion people in the next few decades. In the same way, oil’s “tipping point” became the topic of a bestselling book and was widely publicized.

Power Hour Noon LogoNow the prices of both agriculture commodities and oil have plummeted. Oil has drawn new headlines. Ag prices? Not so much, meaning several questions still need answers: How long will lower commodity prices last? Is the idea of a new price plateau history? And what about the 9-billion-person global population expected by 2050?

Food Demand Will Ease. Several research papers suggest that, just as Malthus was wrong about population in 1798, modern alarmists also have been overly pessimistic.

For example, research published by the United Nation’s Food and Agriculture Organization predicts global food demand will slow to 1.4% between 2007 and 2030 and to 0.8% from 2030 to 2050, down from 2.2% during 1970 and 2007. The data are included in a study by Yelto Zimmer, coordinator of the agri benchmark Cash Crop Network, based at the Thunen Institute of Farm Economics in Germany.

“Factors contributing to that slowing in demand growth are a reduction in the population rate; an increase in the elderly population, who tend to eat less; and the increase in the share of population whose diets have reached the saturation level,” Zimmer explains.

More importantly, the ability of the global agriculture sector to expand supply in the long run continues to be underestimated, he says. “First, yields on land already in use are not being maximized globally. Wheat yields average only 40% of their agronomic potential. Just proper fertilization and better crop management would allow raising yields dramatically.”

In fact, it is possible that as producers adopt modern production practices, the interaction among factors such as improved seed, better weed control and precise fertilizer application lead to exponential growth in yield and production. That’s one reason Robb Fraley, chief technology officer at Monsanto, always has said agronomic changes will play a major role along with adoption of improved seed. Zimmer’s farm-based numbers found that yield increases from more intensive farming offset higher input costs, so breakeven remains the same or improves. 

Also, Zimmer says, there are millions of acres of prime arable land still available to bring into production without tearing up rainforests. Some 3.9 billion acres are in production; a 2008 study found another 1.7 billion acres of arable land is available globally. 

Calculate Production Shifts. At what price will production expand enough to meet demand? Begin by looking at how crops are being used, experts advise.

For example, half the global increase in cereal consumption from 2005/06 to 2007/08 was absorbed by U.S. ethanol production, according to Pat Westhoff, Food and Agriculture Policy Institute. Biodiesel production accounted for one-third of the increase in vegetable oil use from 2004 to 2007, according to Donald Mitchell, an economist with the World Bank in Washington. Yet with oil prices at $40 instead of $100 and a drive to nonfood feedstocks for renewable energy, such growth is unlikely to continue.

That leaves changes in the cost of production, transportation and logistics as factors influencing long-term commodity prices. Economics 101 says when producers have little or no control over input costs or the price received for their products, prices received must rise to cover costs or producers will shut down. The mitigating factor, Zimmer says, is land rents. They act as a buffer to producers seeking to cut costs. Based on agri benchmark data from farms around the world, Zimmer found land values and land rent do, indeed, adjust to farm profitability. Midwest land values have begun to fade, and rents are “stickier” but likely to follow suit.

In the long run, commodity prices might increase, but only modestly, Zimmer concludes.

Global Population To Slow. In an even more bearish outlook, a Purdue University study references many of the same factors to conclude in the long run, food prices mostly likely will resume their historical downtrend, adjusted for inflation. Tom Hertel and Uris Lantz Baldos created a chart showing how increases in farm productivity from 1961 to 2006 accounted for a 28% drop in global crop prices:


Meanwhile, population growth exerted an upward move of more than 25%; income per capita a small increase; and biofuels almost none. Their scenarios out to 2051 show productivity will continue to reduce prices by 30% or more, while population growth and income per capita will exert upward pressure. The effect of biofuels remains quite small.

“Looking back at history, we see that the increase in food demand was fueled mainly by population growth,” the Purdue report concludes. “This period also was characterized by strong agricultural productivity growth that led to significant gains in food production. Moving forward to mid-century, our analysis suggests that, despite slower productivity growth as well as the rising importance of income growth in the world’s poorest countries and the increasing use of crops for biofuels, global food prices will still fall due to the slowdown in global population growth.”

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Spell Check

Chappell, NE
3/25/2015 08:31 AM

  This author claims wheat yields are only 40% of their agronomic potential and with "just proper fertilization" yields could be raised dramatically. Who does he think will be paying for this "proper fertilization" when we currently have fertilizer priced for the 22nd century while grain prices are falling back to 18th century levels? We will much more likely be seeing NO fertilization on wheat ground as early as next fall and that 40% will be falling, not rising.

Anywherebut, DC
3/27/2015 10:46 AM

  What is dangerously bizarre is that we carry only enough to make it through a couple of months, or weeks, each year. And yet the price of grain commodity crops is at or below the cost to produce them. Does anyone realize how insane that is, historically. Civilization used to try to keep many months' of extra storage on hand, and look at how Egypt had years' worth on hand when they entered a global drought, and all the world came to them for food. This "just in time" food system is highly irresponsible, and with the big banks and speculators keeping the prices down, it will only get worse. Pay the farmers for their labor and risk, and get the food supply back up to at least an extra year's worth, for when all the factors align for that global food catastrophe, so that there is at least time for one season to go all-in to make up for the prior loss!

Walt Guterbock
Anacortes, WA
3/25/2015 01:34 PM

  The article does not mention the high loss of food (estimated at about half of what is grown) due to harvest losses, storage losses, high levels of rejection due to quality standards such as perfect appearance, and food discarded by consumers. Just cutting the waste would "create" a lot more food.


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