The Congressional Budget Office (CBO) recently released projected spending for federal agricultural programs from 2021 to 2031. To make these ten-year projections, the CBO used estimates of commodity prices over the next 10 years. CBO price estimates for 2031 are $3.90 a bushel for corn, $10 a bushel for soybeans and $5.15 a bushel for wheat. Overall, CBO prices are reverting to 2014-2020 averages, which represents what can be considered long-term prices. These prices are well below projections for 2021 and 2022 levels. If prices return to long-term averages, considerable adjustments will have to take place in the agricultural sector.
Long term price
Agricultural commodity prices generally fluctuate around a long-term average, but do not trend upwards or downwards (see daily farmdoc March 29, 2011, February 27, 2013). This feature is illustrated in Figure 1, which shows average market year (MYA) prices for maize. MYA prices represent the average price received for corn by all US farmers and are calculated by the National Agricultural Statistics Service.
Three periods can be discerned in Figure 1:
- Average prices are $1.17 from 1960 to 1973.
- Prices reached a new, higher plateau in 1973. Exports of S. began to grow in the late 1960s due to several US policy developments. In 1973, the Soviet Union made large grain purchases, reversing trade policy dating from the Bolshevik Revolution, thereby opening more markets to world trade. From 1973 to 2005, corn prices averaged $2.36 per bushel. Sometimes corn prices were significantly above the $2.36 average, as happened in 1995 when corn prices were $3.24 a bushel. Some believed that prices had reached a new higher plateau, but that was not the case. Corn prices fell back below the $2.36 average, falling to $1.94 per bushel in 1998.
- Prices again reached a new higher plateau in 2006, mainly due to the growth of corn used in ethanol production. From 2006 to 2020, corn prices averaged $4.22 per bushel.
In its May 2022 World Agricultural Supply and Demand Estimate (WASDE) report, the Office of the Chief Economist projected corn at $5.90 per bushel for the 2021 marketing year, well above the $4.22 average from 2002 to 2020. This has led some to suggest that prices may move to another new higher plateau. However, long-term forecasts made by the USDA, as well as projections by the CBO, suggest otherwise.
Table 1 shows forecasts from three sources:
- ERS futures contracts. The Economic Research Service (ERS), an agency of the USDA, publishes a methodology for estimating MYA prices based on Chicago Mercantile Exchange (CME) futures prices (here). This methodology uses CME futures prices to project monthly prices, which are then adjusted to spot prices on a historical basis. The MYA price is then estimated using historical monthly marketing weights. The values for 2021 and 2022 shown in Table 1 come directly from the spreadsheet downloaded from the ERS website. These websites were used to project the 2023 MYA price based on futures settlement prices on May 27e2022.
- Each February, several agencies within the USDA release final estimates of the supply and demand situation over the next ten years at its annual Agricultural Outlook Conference. The 2022 version of this report, titled USDA Agricultural Projections to 2023, provides these usage estimates along with price projections from 2021 to 2031. These prices are shown in Table 1 for 2023 to 2031. The 2021 and 2022 forecasts come from of the WASDE Report.
- The CBO shows the prices used in its May 2022 estimates of farm program spending (here).
The USDA and CBO projections are made by government agencies that are in contact with each other. USDA forecasts likely influence CBO forecasts, and vice versa. Therefore, the two forecasts are not completely independent of each other.
Currently, all forecasts have MYA 2021 prices well above the long-term average of $4.22: $6.26 for the ERS forecast, $5.90 for the USDA, and $5.80 for 2021 (see figure 2). All forecasts have 2022 at higher prices: $7.18 for ERS forecast, $6.75 for USDA and $6.00 for CBO. Then all three have lower prices in 2023: $5.50 for ERS forecast, $4.50 for USDA, and $4.45 for CBO.
Futures contracts with a significant amount of trades do not exist after 2023. Therefore, only USDA and CBO forecasts are available for previous years. The USDA forecasts prices to reach $4.00 by 2026 and then remain at this level until 2031. Over the following years, the USDA forecasts prices below the 2006-2020 average of 4.22 $.
CBO also has prices below the 2006-2020 average of $4.22. Over the years, CBO price estimates range from $4.10 in 2024 to $3.80 in 2032.
Both the USDA and CBO forecast much lower prices after 2022 than in 2021 and 2022. Essentially, 2021 and 2022 are an outlier caused by a combination of tight global inventories, production uncertainty, a high demand for grain from China and grain disruptions. of the Ukraine-Russia conflict. However, their forecasts suggest that the situation is not permanent and that prices should return to current averages in the longer term.
A similar situation exists for soybeans. From 2006 to 2020, soybeans averaged $10.20 per bushel (see Figure 3). MYA prices are expected to be well above the average of $10.20 in 2021 and 2022. The USDA forecasts a price of $13.25 for 2021 and $14.40 for 2022. For both years, the ERS approaches Futures and USDA end up at roughly similar prices. The CBO estimates a decline in prices in 2022 at $12.50, which is $2.00 lower than forecasts based on ERS futures and estimates used in USDA’s long-term projections.
The USDA and CBO both have soybeans headed towards 10.00 a bushel through 2026 and then remaining at that level for the rest of the projection period.
The average wheat price from 2006 to 2020 was $5.62. For 2022, the ERS forecast is $11.23 and the USDA estimate is $10.75, while the CBO estimate is lower at $7.65 (see Figure 4). The USDA has wheat prices reaching $5.50 by 2024, then dropping to $5.25 for 2030 and 2031. The CBO projects $5.25 in 2025. After that, cuts continue until until a price of $5.10 is reached in 2032.
The USDA and CBO forecast methods have prices falling after a higher period in 2021 and 2022. This is a reasonable belief and a modeling result, especially given that changes Long-term price histories only occur occasionally and are usually associated with a sustained change in demand. The movements back to the 2006-2020 averages suggest that the current robust market resulting from China and the Ukraine-Russia conflict is transitory and will also lead to growth in agricultural production, leading to lower prices.
If prices do return to the 2006-2020 averages, adjustments in the agricultural sector will have to take place. In Illinois, the breakeven price for corn in 2022 is expected to be $4.73 per bushel for corn and $11.06 per bushel for soybeans (daily farmdoc, December 21, 2021). Both of these equilibrium prices are above the USDA and CBO price projections in the years after 2024, suggesting that costs will need to be reduced. Current events that contribute to strong commodity prices are also driving up production costs, especially for inputs such as fertilizers and other chemicals. While a component of these cost increases may also be transitory, additional adjustments will likely be required if commodity prices return to lower levels as expected. Lower yields are generally associated with downward pressure on cash rental rates, which could then lead to lower farmland prices.
Yet these ramifications are in the future. The timing of the price decline is uncertain. The war between Ukraine and Russia could have longer-term repercussions than currently expected. The course of inflation and other events is uncertain.
Congressional Budget Office. CBO May 2022 Baseline for Agricultural ProgramsMay 2022. https://www.cbo.gov/system/files/2022-05/51317-2022-05-usda.pdf
Economic Research Service, United States Department of Agriculture. Average price forecast for the season. Last updated Friday, May 13, 2022. https://www.ers.usda.gov/data-products/season-average-price-forecasts
Irwin, S. and D. Good. “A new era in crop prices? » daily farmdoc (1):27, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 29, 2011.
Irwin, S. and D. Good. “The New Era of Crop Prices – A Five-Year Review.” daily farmdoc (3):38, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 27, 2013.
Schnitkey, G., C. Zulauf, N. Paulson, and K. Swanson. “2022 equilibrium price for corn and soybeans.” daily farmdoc (11):168, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, 21 Dec 2021.
United States Department of Agriculture. USDA agricultural projections to 2031. February 2022. https://www.usda.gov/sites/default/files/documents/USDA-Agricultural-Projections-to-2031.pdf
United States Department of Agriculture. Estimates of world agricultural supply and demand (WASDE-624-2), published May 12, 2022. https://usda.library.cornell.edu/concern/publications/3t945q76s?locale=en