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Inflation and Commodity Prices • FarmDock Daily

Inflation rates have recently reached relatively high levels, raising questions about the effects of inflation on corn and soybean prices. Overall, there is a weak positive correlation between inflation and commodity prices. We present a history of inflation rates based on the year-to-year percentage change in the consumer price index, corn and soybean prices, and then discuss the link between inflation rates and commodity prices.

Inflation

Inflation has increased in recent months (see Figure 1). As measured by the Consumer Price Index (CPI) for urban consumers, inflation rates have risen more than 8.0% in the past three months: 8.6% in March, 8.2% in April and 8.5% in May.

Before 2022, the inflation rate exceeded 8.0% in January 1982 at the end of the high inflation period from 1973 to 1981 (see Figure 1). During this period, inflation rates increased by more than 8.0% per month from October 1973 to August 1975 and again from September 1978 to January 1982 (see Figure 1). The effects of high inflation on the economy were worrisome, eventually leading to Paul Volcker’s appointment as chairman of the Federal Reserve Bank (FED) in August 1979. When Volcker was president, the FED took steps to reduce inflation rates (see Federal Reserve History). As a result, the United States experienced lower inflation from 1983 to 2020, when inflation fell and the inflation rate averaged 2.6%.

Inflation has risen in the last half of 2021, with inflation rates increasing by more than 6.0% per month since October 2021. Various explanations can be given for these higher levels:

  1. COVID and reactions led to a recession period in which consumer spending was slowed down and savings increased, bringing increased costs due to increased demand as economic activity resumed.
  2. The epidemic caused supply chain disruptions. Now, global markets are trying to adapt to consumer demand for products and services that have been replaced by pre-Kovid levels. Adjustments lead to shortages, overall difficulties in meeting customer demand, and high prices.
  3. The federal government has set up a package of assistance to the economy and directly to consumers, which increases spending power and demand for products, which can lead to price increases.
  4. Fuel prices have increased due to government policies and the Ukraine-Russia war.
  5. Due to global demand, food prices have increased.
  6. Higher labor costs as employers increase wages to attract workers. Labor wage inflation often translates to higher general inflation (see below) FarmDock daily January 6, 2022)

Corn and soybean prices

Over time, corn and soybean prices do not share the same patterns as inflation rates. Corn and soybeans exhibit long-term nominal prices around the plateau or “long-term” average prices (see FarmDock daily, May 31, 2022, March 29, 2011, and February 28, 2013). During these periods, prices exhibit significant differences in the long-run average but do not trend upward or downward (see Figure 2). Plateau Periods:

  1. 1960 to 1972. From 1960 to 1972, corn prices averaged $ 1.17, and soybean prices averaged $ 2.70 per bushel.
  2. 1973 to 2005. From 1973 to 2005, corn prices averaged $ 2.36 per bushel, and soybean prices averaged $ 6.00 per bushel.
  3. After 2006. From 2006 to 2022, corn prices average $ 4.22 per bushel, and soybean prices average $ 10.00 per bushel.

In general, some identifiable factors cause changes in long-term prices. For example, increased export demand and an overall increase in global trade contributed to the 1973 increase. The increase in corn consumption in ethanol production and growth in major export markets such as China led to an increase in 2006.

Note that corn and soybean prices are highly correlated. From 1963 to the present, the correlation coefficient between corn and soybean prices was .94. The main use of corn and soybeans is livestock feed, meaning the same demand factors affect each crop. In addition, crops are produced in the same production areas, with the result that the yield is positively correlated. Acres used in corn and soybean production in the US are relatively stable and slow to adjust. Since both prices are highly correlated, the following section focuses on corn prices, but the same factors apply to soybeans.

Changes in inflation and long-term prices

The change in long-term prices that occurred in 1973 coincided with the onset of the period of high inflation (see Figure 3). Corn prices exceeded $ 2.00 per bushel for the first time in July 1973. In April 1973, inflation rates exceeded 5.0%.

The change in long-term prices in 2006 was not related to the period of high inflation. Inflation rates changed in the 2000s but did not reach the levels experienced in the 1970s and early 1980s.

As a result, historical changes do not present a clear link between inflation and long-term price changes. When prices rose to a new high plateau during roughly the same high inflation period in 1973, higher prices had more to do with export demand than inflation. If anything, the rise in commodity prices reinforced high inflation.

Currently, corn prices are above the $ 4.22 average representing the plateau since 2006 (see Figure 3). Inflation is also relatively high. As a result, it can be said that commodity prices have reached a new plateau as early as 1973.

There are reasons to be cautious from this perspective. First, the linkages between long-term commodity price changes and inflation are weak. Secondly, we have seen prices at current levels in 2011 and 2012, after which prices were below the $ 4.22 long-term average. Third, previous changes in long-term prices are related to long-term supply-demand changes: in 1973 export demand increased and corn consumption in ethanol production occurred in the mid-2000s. The factor that causes current, permanent, or long-term supply-demand changes has not been identified. The factors that are currently causing high prices are temporary, such as strong commodity demand from China to be reduced by good Chinese crops or Chinese recession, or the end of the Ukraine-Russia war in the future.

Even if a new long-term plateau occurs, it is not at the current price level. Prices may be below the current break-even level of $ 4.73 per bushel of corn and $ 11.06 per soybean (see below). FarmDock daily, December 21, 2021). Increasing the yield of the above trend may result in lower prices in the future.

Correlation between inflation rates and prices

We calculated the monthly difference in monthly prices and long-term prices and then correlated that difference to the inflation rate. .19 correlation coefficients for corn and .11 for soybean. There is little positive correlation between inflation rates and corn and soybean prices.

As expected with lower correlation coefficients, the correlations between inflation and commodity prices are not as strong. Periods of inflation are relatively high, and commodity prices are down, as happened in 1999. In contrast, commodity prices reached an all-time high in 2011 and 2012, and inflation rates remained relatively low.

Summary

Relationships between inflation and commodity prices are weak. Overall, market demand and supply factors significantly influence corn and soybean price levels rather than inflation. Current high inflation rates do not imply a sustained period of higher commodity prices.

References

Irvine, s. And d. Good. “New Era in Crop Price?” FarmDock daily (1): 27, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 29, 2011.

Schnitkey, G. “Crop Insurance Use in 2011 and Tips for 2012.” FarmDock daily (2): 39, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 28, 2012.

Schnitzki, G., C. Zulaf, n. Paulson et al. Swanson. “2022 Break-Even Prices for Corn and Soybeans.” FarmDock daily (11): 168, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 21, 2021.

Schnitzki, G., C. Zulaf, n. Paulson, K.. Swanson and J. Baltz. “Are long-term prices still $ 4 for corn, $ 10 for soybeans and $ 5.50 for wheat?” FarmDock daily (12): 79, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, May 31, 2022.

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