High grain prices are here to stay

CHAMPAIGN, Ill. — An ethanol-fueled spike in grain prices will likely hold, yielding the first sustained increase for corn, wheat and soybean prices in more than three decades, according to new research by two University of Illinois farm economists.

Price surge

Corn, an ethanol ingredient which has driven the recent price surge, could average $4.60 a bushel in Illinois, nearly double the average $2.42 a bushel from 1973 to 2006, said Darrel Good and Scott Irwin, professors of agriculture and consumer economics.

They said price swings stemming from weather or other market variables could send corn as high as $6.70 a bushel or down to $3, based on a review of market data dating back to the mid-1900s, for a report titled The New Era of Corn, Soybean and Wheat Prices.

Soybean prices could average $11.50 a bushel, up sharply from an average of $6.15 from 1973 to 2006, with swings from $8.20 to $19 a bushel.

Wheat could increase to an average $5.80 a bushel, up from $3.24, dipping as low as $3.30 a bushel or as high as $10.15.

Although the forecasts are based on Illinois grain prices, Good said increases will likely be similar on a percentage basis in other grain-producing states.

Effects of ethanol boom

The study stemmed from concerns as farmers tried to get a handle on rising prices when markets turned volatile in the wake of the ethanol boom.

Research revealed just two earlier lasting increases in grain prices. The first came after World War II, when price controls were lifted and post-war rebuilding began.

The second lasting increase began in 1973, sparked by shifts in exchange-rate policies, massive grain purchases by the former Soviet Union and a period of escalating energy prices and more rapid inflation.

Good said the dawn of the new era mirrors the earlier ones, driven by the growth of ethanol and accompanied by higher inflation and production costs which have been permanently inflated.

The study forecast average prices for the new era based on increases between the World War II and post-1973 eras, which ranged from 79 percent for wheat to 134 percent for soybeans.

It also accounts for fluctuations as the new higher prices take hold, setting a range of possible highs and lows based on data from the first five years of the earlier eras.

New price era

Irwin said the new price era could easily last two or three decades, sustained by corn prices which are now tethered to near-record gasoline prices because of ethanol.

New era prices would not be affected by a shift from ethanol to another fuel additive made from crops, such as switchgrass, according to Good.

Finite land available for production would continue to drive up prices for other grains, just as corn has raised prices for soybeans and wheat.

Irwin said food costs have likely seen the worst of the shift to higher-priced grain after posting 5 to 6 percent increases this year.

But he warned commodities account for just 20 percent of food costs, so prices could still rise to cover labor, transportation or other expenses.

The report stated Illinois farmers posted record earnings in 2007, and likely will again this year.

But profits will ultimately dip back to historical levels of roughly $50 to $60 an acre as land and production costs rise to keep pace with new era prices.

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