Study Examines What Determines Corn, Wheat Prices

August 9, 1999

A new USDA study examines how market factors and government programs influence corn and wheat prices. It examines how major deviations from trend yields may have a significant price impact, for example, and traces the demand factors such as domestic use which is an increasing component of demand.

Corn yields increased from 74.1 bushels per acre in 1965 to 127.1 bushels in 1996, a 72% increase. Corn yields trended up by 1.5-2.0 bushels per acre per hear from 1965 to 1997. Yields are expected to increase, assuming producers adopt favorable production practices developed through research and select hybrids with high yield potential, the study says.

Average wheat yields increased from about 30 bushels per acre in the mid-1970s to 37 bushels in 1990-96. The current yield trend for wheat is about 0.2-0.3 bushels per acre per year.

Domestic corn use averaged 79% of total disappearance in 1990-96 compared with 69% in 1975-80. Increased production of alcohol fuels and corn sweeteners contributed to that increase. Domestic wheat consumption accounts for about 50% of total wheat disappearance compared with 39% in 1975-80 with much of the increase reflected in wheat flour consumption.

Corn or wheat consumption for food use usually follows a trend, because gains are related largely to population growth. Changes in tastes or preferences at times may alter consumption trends. Annual increases for food use items also depends on whether the market is new and developing, with relatively strong growth, or has reached a stage of mature or stable growth.

Food uses are relatively unresponsive (inelastic) to farm-level prices, since the farm value of grain in consumer food items is small, the study says. Food use of corn, such as cereals and other products, starch beverage alcohol and corn sweeteners, has increased sharply over the past 20 years. Demand for corn-based cereals, snack foods and baked goods is expected to increase near the rate of population growth.

Demand for corn sweeteners has been stimulated indirectly by the sugar program. The sugar program has kept the price of domestically refined sugar high, stimulating consumption of high-fructose corn syrup as an alternative sweetener. Future increase in corn demand for sweeteners should exceed population growth but likely will be much less than the sharp gains in the early to mid-1980s.

Wheat food use has been the largest and most stable component of domestic wheat use and is characterized by a steady growth rate, closely tied to population, tastes and preferences. Wheat food use accounted for an average of 35% of total wheat disappearance in 1990-96 compared with 30% in 1975-80. Wheat is unique, the study notes, because it is the only cereal grain with sufficient gluten to produce bread without requiring mixing with another grain.

The entire report is available on USDA's Economic Research Service web site, http://www.usda.gov.