What's the Best Cure for Low Prices?

April 29, 2016 04:02 PM
 
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Did you know the adage “the best cure for high prices is high prices” is nearly a century old? It was coined in 1918 by American financier Henry Clews.

The term has some merit when it comes to grain prices. Generally, when there are high prices, supplies will increase and demand will decrease until prices go back down.

But is the corollary also true – are low prices the best cure for low prices? Some certainly think so, including ag economist David Widmar, who recently tackled the topic in his “Agricultural Economic Insights” blog.

“During a high-price period, acres are brought into production,” he notes. “Low prices get acres sidelined and moved out of production.”

These trends have happened before, Widmar says, with the most recent cycle beginning in 1996. From 1996 to 2006, crop acres slowly dropped by 18 million acres, switching to CRP, pasture and other usages. Higher commodity prices in the mid-2000s and early 2010s helped push crop acres back up.

Looking back further, Widmar says the 1970s boom-era production ratcheted up acres of principal crops from 300 million to 363 million – a 21% increase. When the farm economy later came crashing down in the 1980s, principal crop acres fell back down to 305 million acres.

“In short, the expansion and contraction of principal crop acres during the 1970s and 1980s was an important factor of the crisis and recovery,” he says.

If acres go out of production, where will they go? Widmar says CRP or other governmental influence may prove the biggest wildcard during the process. CRP acres are the lowed they’ve been since 1989, down from the program’s peak in 2007 of 36.8 million acres to 24.2 million acres in 2016.

On the more positive note, the latest expansion of principal crop acres was 10.8 million, a far smaller amount than the 63 million acre expansion seen in the 1970s.

“We expect acres of principal crop acres to fall in the long run, it’s just getting there that can be tricky and painful,” he says.

Meantime, low prices will continue to apply pressure to overall acres.

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Comments

 
Spell Check

Sam c
Savannah, MO
4/29/2016 07:12 PM
 

  High prices drive production up quickly both in US and global. When the surplus carryover appears and price declines every producer is unique and has an individual cost of goods (largely driven by ratio of owned/rented land). As a producer is squeezed out the land rarely sits idle it is just rented to someone else. Only low quality ground is truly idled and that doesn't reduce the surplus much. The examples the author cites are all government led intervention to reduce production. The US has not had a free ag market for 80 years. No one alive remembers that. I would suggest you look at what has happened to the price of tobacco with a totally free market

 
 

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