Corn reached a high point of $8.44 per bushel in August of 2012, and hindsight now suggests that a bear market began at that moment. Since vicious bear markets often follow on the heels of vigorous bull markets, the poultry industry can hope or at least dream about $5 or less corn this fall. Is this dream realistic?

The price of corn will, of course, not reach anything close to $5 a bushel if there is another drought. While nobody knows for sure whether or not there will be a drought this year, it is important to note that for any given year there is a 17 percent chance of a drought in the Corn Belt. Therefore, there is an 83 percent chance of normal or fairly normal weather conditions this year. Coincidentally, 17 percent is about the same chance as getting a "7" when rolling dice, something that is surprisingly difficult to achieve particularly when you want a "7".

Corn prices rise, and fall

Apart from the difficulty of rolling a "7", there is another fact of life that should bring comfort to the chicken industry and the opposite of comfort to our good friends, the corn farmers. That fact of life is that commodity prices go down as well as up, and they do so in a fairly regular and predictable manner.
For the last three years, corn prices reached a new record high average price each year. It was not just grain. Commodities of all kinds, including most notably oil, reached and sustained record high levels. The movement of commodity prices is shown clearly in the Commodity Price Index. That index tracks a basket of commodity prices including energy and grain. It increased 400 percent between 2002 and 2012 producing the classic hockey stick shaped graph, "Commodity price index, 1992-2012."

Commodity prices are due for a drop

The naive conclusion to draw from the commodity graph is that of an ever upward-rising price of commodities. However, trees do not grow to the sky, and every bubble is eventually burst. Commodity prices are due for a drop.

When commodity prices increase by 400 percent over a period of 10 years, as they have just done, the one thing that is sure not to happen is another 400 percent increase in the next 10 years. The recent increase in the index had two important effects on commodities: a supply response and demand destruction.

Oil exploration, grain plantings have increased

The supply response of oil is instructive. A 1,000 percent increase in the price of crude oil between 1998 and 2012 put in motion a $500 billion dollar per year worldwide oil and energy exploration boom, which is in the process of coming to fruition. At $100 per barrel, oil and gas production from the deep sea, oil shale, the arctic, you name it, are all profitable. Although it is true that someday the world's oil supply will run out, due to the fact that fossil fuels are non-renewable, that is not relevant to a short term discussion of supply and price.


In a similar fashion, grain production is increasing rapidly around the world in response to high grain prices. The world production of corn, for example, doubled in the last 10 years, and new corn exporting powers, such as Brazil and the Ukraine, are emerging. Again, it could be argued that the world will eventually run out of land, water and the ammonia nitrogen fertilizer (made from fossil fuel) that allows corn yields to be 200 bushels per acre versus 50 bushels per acre. However, that is not relevant in the short term.

Rise in commodity prices triggered conservation

On the demand destruction side of the equation, the 400 percent increase in Commodity Prices triggered conservation. Fuel and grain are being used more efficiently. Longer distances are being driven with the same amount of gasoline due to more efficient cars. The world per capita consumption of beef, the least efficient converter of grain to meat (at least in feedlots), dropped by one kilo per person worldwide over this period of high grain prices. A lot more attention is being paid to feed conversion in chickens.

A 50 percent retracement in commodity prices ahead?

To summarize, the 400 percent increase in commodity prices stimulated supply and diminished demand from what otherwise would have been the case. Increased supply and reduced demand generally lead to lower prices. The extent and timing of the drop cannot be known; nevertheless an estimate based on technical chart analysis would suggest a 50 percent retracement of prices.

A 50 percent retracement in prices would put the Commodity Index back at 125 down from nearly 200 recently. For corn prices, a midway point between the $2.50 per bushel prices of the good old days and the $7.50 per bushel price of 2012 would be $5 per bushel (this assumes something close to sanity in ethanol policy). Another drought in the U.S. this year would only delay the inevitable, falling commodity prices of all kinds including grain.

Differing views about future grain prices

Should that retracement prediction prove to be correct, the Commodity Price Index would behave somewhat like the graph, "Commodity Price Index, 1992-2022: Projected retracement."

This prediction of falling commodity prices is one which I have delivered frequently in talks this year. The message is not well received by those who have a vested interest in high grain prices. They hope and dream that commodity prices will rise another 400 percent in the next few years, just as they did in the last few years. During one talk I gave this year, an audience member was so enraged by my presentation that he insisted on showing his own slide of increasing Chinese demand as "proof" of a continued and uninterrupted increase in commodity prices. Time will tell who is right.