- Crop prices often move independently of overall inflation
- Sharp rises in crop prices coincided with higher inflation occasionally, notably in 1973 and 2021
- Crop prices are very closely tied to oil prices
- Oil and other commodities can be strongly influenced by growth in emerging markets
Inflation has surged over the past year in Europe and the United States, where the core consumer price index (CPI) exceeds 6% while the headline CPI, including food and energy, has topped 8%. This period of higher inflation has been accompanied by a sharp rise in food prices globally. From their 2020 lows, the prices for corn, soybeans and wheat have increased by over 100%. Vegetable oil prices have risen even further, with a more than 200% rise in the cost of soybean oil that is widely used in cooking.
Food prices, as measured by the CPI, have contributed to rising inflation, but the overall cost of food as experienced by consumers in the U.S. has risen just slightly more than the rate of inflation: 9.4% versus 8.3%. Viewed over a longer time period, the relationship between crop prices and broader measures of inflation is a complex and sometimes surprising one.
A Brief History of Food Prices and Overall Inflation (Figures 1, 2 and 3)
The 1960s: During the first half of the 1960s inflation rates were low and stable at around 1-2% per year and the prices of corn, soybeans and wheat traded in a narrow range. During the second half of the decade, inflation began to rise as a Great Society policy to end poverty and Vietnam War-related boom in Federal spending combined with an easy monetary policy began to overheat the U.S. economy. By 1970, inflation had risen to 6.2%. Despite an overheating economy and rising inflation, crop prices showed almost no reaction, remaining in their narrow range from the early 1960s.
The 1970s: During the first two years of the 1970s, inflation rates came back down and crop prices continued to trade sideways at relatively low levels. Inflation retreated in 1971 and 1972 in part due to the 1969-70 recession that put a lid on wage pressues and also because the Nixon Administration imposed wage and price controls ahead of the 1972 election while simultaneously leaning on the Federal Reserve to persue an easy monetary policy in order to generate strong growth. Wage and price controls helped to contain inflation in the short term but they reduced the incentive to work and to produce goods. As such, after the controls were lifted following the 1972 election, prices began to soar.
The surge in inflation in 1973 coincided with two other events: the Arab oil embargo, which sent the price of oil from $3 per barrel to $14 almost overnight, and the U.S.-Soviet Union wheat deal. This latter agreement allowed the Soviets to buy 10 million tons of wheat from the U.S. at subsidized prices. The agreement took place at a time when grain markets were already expereincing low stocks-to-use ratios. Wheat prices shot up from $1.41 to $6.28 per bushel. Corn prices rose from $1.14 to $3.97 per bushel, while soybean prices jumped from $3.37 to over $12.00 per bushel. Consumer price inflation went from 2.7% to 12.3%, with the Fed rapidly tightening interest rates and the U.S. economy experiencing a deep recession in 1974 and early 1975.
Prices of agricultural goods fell from their highs but entered into a new range that would prevail for nearly three-and-a-half decades. Pre-1973, wheat prices ranged from $1.18-$2.18 per bushel, and from $2.18-$6.20 per bushel from 1973 to 2006. Corn’s pre-1973 range was $1.05-$1.58 per bushel, and post-1973, it spent the next 35 years in a range from $1.43-$5.08 per bushel. Finally, prices for soybeans pre-1973 ranged from $2.10-$3.57 per bushel; its 1973-2006 range was $4.10-$10.55.
Inflation receeded from its 1973 peak following the 1974-75 recession only to surge again beginning in 1977. By 1980, inflation exceeded 14%, yet crop prices were unable to set new highs. Although they rose in the late 1970s, they generally failed to outpace overall inflation (Figure 4).
1980-2006: In late 1979 President Carter appointed Paul Volcker to run the Federal Reserve. Volcker didn’t hesistate to raise rates to tame inflation, putting the Fed funds rate at 20% several times between late 1979 and early 1981, generating two deep recessions, one in 1980 and a second that lasted from August 1981 to December 1982. These recessions hit the U.S. manufacturing and argicultural sectors especially hard. Despite the unpopularity of high interest rates, both Presidents Carter and Reagan stood behind Volcker and his tight money policies. Througout the remainder of the 1980s and 1990s, the Fed maintained interest rates well above the level of inflation. By 1993, inflation rates had come down to the 2-3% range where they remained for the next quarter century.
From 1982-2006 there appeared to be little relationship between inflation and the prices of agricultural goods. Occaisonal droughts or floods would generate steep rises in crop prices as was the case in 1988 and 1996 but crop prices followed their own pattern that was largely independend of overall inflation. What was most apparent, however, was that crop prices fell sharply in real terms. Although inflation was much lower than it was during the 1970s, consumer prices continued to rise. Crop prices moved sideways in nominal terms and fell sharply in real terms (Figure 4).
2007-2022: Beginning in 2002 there was a global rally in commodity prices that was driven by the exceptionally strong growth of the Chinese economy. Agricultural goods were, for the most part, late comers to this rally but in 2007 they began to catch up with energy and metals, breaking decisively out of their 1973-2006 range to the upside and entering into a new post-2007 range. What’s curious is that consumer price inflation remained remarkably stable during this time. It rose a bit in 2008, slumped in 2009 and then remained in a tight range around 2% from 2010 until Q1 2021. Only during the past year have inflation and crop prices once again moved in tandem.
In short, crop prices and overall inflation are not, for the most part, closely syncronized but there are exceptions such as in 1973 and in 2021-22. But if agricultural goods prices are not synched with overall inflation what are they most closely linked to? Crop prices show a higher degree of co-movement with crude oil prices than consumer price inflation (appendix figures 1-5). The connection between crop and energy prices is driven by both the supply and demand side of the equation. On the demand side, higher or lower energy prices can raise or lower the demand for biofuels. On the supply side, higher or lower energy prices can increase or decrease the cost of producing agricutural goods which involves energy at almost every stage, from planting to harvesting to shipping. Finally, energy and crop prices appear to follow a measure of the Chinese economy called the Li Keqiang index (read our article here).
Figure 1: Corn prices don’t always move with CPI
Figure 2: Soybean prices are usually pretty independent of CPI
Figure 3: Wheat prices moved with CPI in 1973, 1979, 2008 and 2021.
Figure 4: Between 1973 and 2003 crop prices fell in real terms.
Appendix Charts 1-5
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All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.