The Cure for Low Prices

“And this massive projected corn supply without market-based solutions to increasing corn demand is already causing corn prices to fall further.” This comment was one corn grower’s response to the surprisingly large USDA corn production forecast released on August 12. The production forecast has weighed on corn prices, although after falling initially futures prices have rebounded and as of this writing exceed levels prior to the forecast. The frustrations in the comment are no doubt shared by other corn producers. Producers are facing poor returns and the production forecast only piled on.

The comments, though, caught this economist’s attention because of the phrase “without market-based solutions.” The market’s solution to the large production forecast is implicitly noted in the comment—lower prices. The adage comes to mind, “The cure for low prices is low prices.” The role of price in competitive markets is to allocate resources, serve as a signal to producers and consumers, and balance supply and demand. Low prices signal to producers there is too much production and signals to consumers that deals can be had. Somewhat lost in the reporting on the forecasts was the predicted increase in corn usage. USDA forecasts feed usage and exports to increase for market year 2025/2026. In fact, exports are forecast to set a record in terms of bushels exported. Why? The agency expects lower prices to encourage greater usage.

Surprises to a market, like an unexpected large production forecast, can cause havoc as buyers and sellers seek to assess the situation, determine long-term and short-term implications, and respond accordingly. And, both buyers and sellers will sometimes find themselves on the “wrong” side of a price move. In this case, corn producers are on the wrong side while corn consumers like livestock producers, ethanol producers, and export companies find themselves benefiting. Market-based solutions aren’t always friendly. Markets can be brutally efficient when attempting to balance supply and demand and not care who is bloodied in the process. They create winners and losers but are indifferent as to the side one finds themselves on.