Higher Crop Prices Trigger Production, Investment

Higher Crop Prices Trigger Production, Investment

New study says price changes affect productivity; researchers say it could provide insight for land use and biofuel production issues.

A new study conducted by researchers at North Carolina State University and the University of Illinois at Chicago found a statistical correlation showing that as prices increase, farmers make changes that result in higher per acre yields. The study's findings support the use of yield-price elasticity in indirect land use models, but found that commonly used models currently use factors at the low end of the actual range which underestimates real yield performance.

New study says price changes affect productivity; researchers say it could provide insight for land use and biofuel production issues.

The study assessed two dimensions of this correlation known as yield-price elasticity: first, the extent to which realized yields tend to be influenced by planting-time futures prices; and second, the potential for in-season changes responding to significant price swings. The study found that not only do farmers respond to price from season to season, they also respond to price during the season in order to optimize productivity. 

"Based on these findings there is no question that price has an effect on yields," said Jay Lynch, a farmer from Humboldt, Iowa and board director for the Iowa Corn Growers Association. "And given the factors involved in achieving higher yields, such as investment in new equipment, it is likely that new, higher yields resulting from high prices are sustained even after prices drop."

The study adds to the growing body of evidence that actual indirect land use effects are lower than current models indicate and assumptions that high corn prices do not positively affect yields and productivity are not supported by research.

"It is a logical conclusion that when economic opportunity through greater efficiency is identified, investment occurs and results in the efficiencies that are targeted," said Dr. Barry K. Goodwin, study co-lead and distinguished professor, Departments of Agricultural and Resource Economics and Economics at North Carolina State University.

"In row crop production higher prices trigger positive changes to operations such as investments in better equipment and technology, better navigation and information systems, and so forth. The investment and changes triggered by the higher prices accelerate yield growth so that farms produce more per acre to fully capitalize on the market opportunity of higher prices. It's a logic stream that holds up on the farm as well as other industries," Goodwin said.

The study results show statistically significant response to yield occurs when prices strengthen or fall early (February – April) in the growing season. The results were consistent with qualitative research indicating that seeding rates, farm equipment upgrades and field inputs are influenced during the season by early price swings. Farmers noted that seed selection, investment in equipment purchases, information and navigation systems and other capital investments were considered on a multi-year timeframe.

Dr. Steffen Mueller, study co-lead and principal economist for the Energy Resources Center at the University of Illinois at Chicago said the research was important to understanding biofuel production.

"This research is a positive step forward in understanding with higher certainty the land use effects of biofuels production and should be instructive to the research community and government," he said.

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