What Will the Price of Corn Be After the New Mandate Is Met ?

High prices are their own worst enemy. Increased profi t margins entice entrepreneurial investment, which results in increased production. Lower market prices inevitably follow. The magic hand of Adam Smith ensures that winners’ gains and losers’ losses will be temporary, as entrepreneurs correct market imbalances. The temporary nature of high prices is well known to corn, soybean, and wheat farmers. Over the last 50 years there have been only two corn price increases that have been sustained for more than two years. The fi rst was from 1973 to 1975 when a combination of short crops around the world and increased export demand dramatically increased prices. The second was from 1979 to 1984 when high corn prices were sustained by supply controls, government-defended fl oor prices, and drought. Farmers in the United States and around the world have always been able to out-produce the market and government policy. Farmers have a strong incentive to continually adopt costreducing and yield-enhancing technologies. Thus, even when prices are low, agricultural supply tends to increase, as farmers seek out the seemingly never-ending advances in seed technology, improved pest management, and more productive machinery. When prices are high, farmers have the added incentive to bring more land into production and to plant the crops that bring the greatest economic return. Because farmers have traditionally produced ingredients that are turned into food, the demand for farm products refl ects characteristics of that demand. World food demand depends primarily on population and income, both of which expand predictably and slowly. When production of food ingredients outstrips the growth in food demand for more than a year or two, prices inevitably decline. The resulting price declines can be large because food demand is quite insensitive to price. There really is only so much food any person can eat. Nonstop increases in supply combined with slow and predictable demand growth have resulted in a seemingly inexorable long-run trend of falling infl ation-adjusted agricultural prices intermixed with one or two years of high prices caused by unexpected supply disruptions. In agriculture, as with most other commodities, it has not been a question of if price bubbles will burst but only a matter of when.