The above shows prices for the three main grain crops in the US since 1920, adjusted for inflation (using the CPI). A few basic points for future reference:
- Food crops have been getting gradually cheaper for many years. With a couple of major excursions due to world events (price drops in the depression, and rises in the second world war and 1970s commodity price shocks), the basic trend has been for food to get cheaper and cheaper. This indicates that despite the growth in world population, improvements in agricultural productivity have tended to outpace increases in demand.
- In particular, any possible effect of climate change on agriculture in the future needs to be evaluated in this context: is it likely to be large enough to overcome the historical primacy of technological innovation as the control on prices?
- Note that the fact that prices have been low and dropping for decades means that there will be many possible investments to raise production that will not have been made, because prices were too low to justify them (for example, in the northeastern US, large amounts of perfectly usable cropland have actually fallen out of use because it was not economically competitive with better cropland elsewhere). Therefore, there is likely to be significant scope to increase production in response to any factor that causes a sustained rise in prices.
- The recent rises in food prices since the early 2000s are small compared to historical excursions. But they are still in need of explanation to determine whether they are likely to be a blip, or a more long-lasting trend reversion.
- Prices of crops tend to move together. There are good theoretical reasons to expect this over time, since if crops move too far from their normal relationship, there are farms that can switch from one to another, thus arbitraging prices. For example, if corn gets too expensive relative to wheat, and farmers believe this will continue, some can switch from growing wheat to growing corn, and this will tend to lower the price of corn and raise the price of wheat.
The straight line explains 80% of the variance. Clearly the prices can vary from one another somewhat in the short term by a few bucks, but large scale long term movements are linked.
And here's soybeans versus wheat, which shows the same basic pattern, but with a slightly less strong linkage: