The current economic troubles may lead some to think they won't see last year's record prices again for a long time. But at least one authority thinks it may be too soon to give up on that idea.
"I'm not completely convinced that we have reached a new plateau in pricing," says Frayne Olson, grain marketing specialist with the North Dakota State University Extension Service. "I do think that we are in an era when we're going to have a lot of volatility. Prices are going to be bouncing around a lot and we need to be paying attention to what's happening."
The outcome of this story will have to be told with the benefit of hindsight, he says.
"I think we're going to look back five or 10 years from now and see that these were pretty turbulent times," he says. "A lot of things are changing and it's hard to keep up with the dynamics of what's happening."
This is similar to 1973 and 1974 with the Russian wheat deal, he says. The sale allotted a $750 million purchase of U.S. wheat over the following three years. Announcement of the deal triggered a jump in the domestic price of wheat, and within a few months, the prices of agricultural commodities across the board were climbing fast, headed for a roller-coaster ride not unlike what has been seen the past few years.
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Energy-driven
The new force steering the agricultural markets is energy, and it still is new enough that its appetites remain unpredictable.
"What stimulated the growth and volatility, in particular, in the last couple years, has been the growth of ethanol," Olson says. "And so, we now are looking at, rather than just domestic demand and international demand, we're also adding energy demand to the mix."
Ethanol is projected to use more bushels of corn to meet the federal mandate for ethanol this year than all of the bushels of wheat or soybeans grown in the U.S., he says.
"So there is a linkage now in the markets between energy and the agricultural markets," he says.
But in the supply and demand formula, the supply side is far more stable right now than the demand side. Production expectations for the 2008 to '09 marketing year have been stabilizing, Olson says.
"We have a pretty good idea of how many bushels are out there," he says. "We produced about a 12 billion-bushel crop this year. That's down from last year at about 13 billion bushels, but the consumption part of this is what everyone is concerned about."
Ethanol demand has been dropping, but it still used about 30 percent of the 2008 corn crop. However, with the uncertainty of the overall economic situation, the planning horizon for the market analysts and ethanol industry is relatively short.
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"They know that what happens in Washington can change very quickly, and they are keeping an eye on it," he says. "Most of the people that are doing forecasting are looking at that and saying, 'We'll just take that mandated use and work backwards.'"
Other factors
About 44 percent of the U.S. corn crop goes for feed use. Because of the ethanol-induced demand for distiller's grains, a byproduct of distilling ethanol from corn, there is a feedback loop from the ethanol industry back into the feed industry.
"And so as we adjust ethanol use, we also have to adjust the feed use out of it. That's also a new dimension to the forecasting," Olson says.
There also is a large supply of feed wheat, which was drowned before harvest last year, coming out of the European Union.
The other market factor is exports. The exports for corn make up about 15 percent of the total use, and the exports for corn have been soft.
"That's one of the areas that people have a big concern about," he says.
USDA currently is forecasting the national average price at about $3.90 per bushel.
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"If you convert that into North Dakota . . . you get about $3.55 as a season-long average," he says.
Whether that holds up remains to be seen, and keeping a sharp eye on the market factors will be key.
None of them are easy to predict, "and that's part of the reason we're seeing prices bouncing around," Olson says. "People are trying to adjust to these new dynamics."
