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.

0
Commodity price index and projected retracement: 1992-2022

200
175
150
125
100
75
50
25

19921994

2004

2006

2008

2000

20 02

1996

1998

2020

2022

2016

2 018

2 010

2 012

2 014

A 50 percent retracement in commodity prices would put the Commodity Index at 125, down from nearly 200 recently.

Rise in commodity prices
triggered conservation

On the demand destruction side of
the equation, the 400 percent increase in
Commodity Prices triggered conserva-
tion. Fuel and grain are being used more
ef;ciently. Longer distances are being
driven with the same amount of gasoline
due to more ef;cient cars. The world per
capita consumption of beef, the least ef;-
cient 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.

this year would only delay the inevitable, falling commodity prices of all kinds including grain.

Photo credit: Andrea Gantz

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.

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 and pro-
jected retracement: 1992-2022.”
This prediction of falling commod-
ity 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 show-
ing his own slide of increasing Chinese
demand as “proof” of a continued and un-
interrupted increase in commodity prices.
Time will tell who is right. ;