Consumers have faced steep price hikes at the grocery store in recent years, as food-price inflation has outpaced wage growth.
And against a backdrop of global population growth, and a rising middle class in many emerging regions, the demand for food continues to increase.
As any economics student that made it through the first week of a 101 course knows, increased demand typically leads to increases in market price. That’s exactly what we’ve seen in agriculture commodities over the past several years.
As the demand for food increases, so does the demand for staple crops like corn, wheat and soybeans. These commodities are the building blocks for a wide range of finished food products.
Wheat is used to make cereals and flour.
Corn is used in cereals, livestock feed and even biofuel.
Soybeans are crushed to produce soybean meal and soybean oil, which then goes toward making a number of products.
So the increasing demand for food works its way down the supply chain, increasing the demand for these crops. And while farm production has increased, allowing for greater supplies of corn, wheat, and soybeans, demand is still growing faster than supply. That means further price increases.
Rising crop prices was the general trend until this year. Take a look at how corn, wheat, and soybean prices have fared since the start of 2013…
Soybean prices have continued higher, but the wheat and corn futures markets cracked, losing 20% and 27% respectively.
Lower crop prices are good for consumers, as your morning bowl of Wheaties or Corn Flakes gets cheaper. They’re also good for those food producers who use corn and the like as feed for chicken and cattle.
But for grain farmers, falling prices are potentially devastating to their bottom line. Most will be able to weather a year of low prices, but if the trend continues it will put many small farmers out of business and could prompt the selling of much farm land.
“All good things must come to an end,” it’s said. Farmers who have ridden the steep increase in farmland prices may be facing this fate sooner than most expect.
As investors, it’ll pay to shy away from this space until the excesses are worked off. As they say: “there are greener pastures beyond.”