Although “staggering” price increases for many key commodities have occurred since 2007, with several at or near historic highs, this should not be a major contributor to inflation, says O.A. Cleveland, Jr.

“The bull market in commodities has a good bit more life,” he said in a discussion at the Starkville, Miss., Rotary Club. “It could last another five years or more. But I don’t see inflation as a problem.”

Cleveland, who is Extension agricultural professor emeritus at Mississippi State University, says “a lack of money supply available to consumers” will hold inflation in line. “They don’t have the spending power they had prior to 2008. Unemployment remains high, which also serves to limit consumer cash for purchases; those who are out of work are using what cash they have for food and necessities.

“People are more cautious about spending in general— they’re actually saving more and paying down more on debt than in a very long time.”

The outlook points to a continuation of the bull market for agriculture, Cleveland says. “It will take at least three years for price ratios to come back in line.”

There’s a big “but,” however — “With ethanol expected to use 40 percent of the U.S. corncrop, the commodity boom could last another five to 10 years.”

Ethanol production, subsidized by the government at 45 cents per gallon, (estimated to total $31 Billion in 2011)was originally intended to relieve the pressure on U.S. imports of oil, Cleveland says, “but a corollary impact was to raise world food prices,” sparking protests in many countries around the world.

With world population increasing by 75 million each year — the equivalent of 25 states of Mississippi — demand for commodities will remain strong, regardless of whether the economy is good or bad, he says.

People will keep eating

“In a good economy, commodities will make money; in a bad economy, the government prints money and commodities make money. In either scenario, people will continue to eat.”

Since 1997, soybeans, corn, and wheat prices have risen 200 percent to 275 percent, Cleveland notes. Cotton “has enjoyed the most fantastic run in history,” up 300 percent over the last year, and 100 percent in the past six months; silver is up 600 percent over the last five years, gold continues to reach new highs, and oil is again over $100 per barrel.

“Delta farm land that was $2,000 per acre six years ago is $4,000 to $4,500 today, and none is for sale.”

While the big runup in commodity prices has occurred since 2007, the seeds for it were sown in 1970, he says, with Russia’s political decision to upgrade the diets of its people.

“Over a single weekend, they purchased much of the U.S. wheat crop, immediately sending the market limit up, a trend that continued for several days. The wheat that had been $2.50 jumped well above $6.”

In time, the supply-demand situation was brought back into balance and prices stabilized.

But in 2000, Cleveland says, both China and India made political decisions to update the diets of their people, the Chinese opting to do it with pork, the Indians with poultry.

“These two countries are feeding more than 2billion people — 20 times more than Russia when it bought up U.S. wheat. And all those animals need grain.

“China’s hog industry is four to five times larger than ours; they are the world’s largest importer of soybeans, corn, and cotton, and have the world’s largest textile industry.”

Toss into this mix the U.S. decision in 2002 to use corn as a feedstock for ethanol and to subsidize ethanol production, major oilseed and wheat crop failures in 2007 in Europe and Australia, and “demand for oilseeds, feed grains, and food grains had jumped well above supplies.”

The brink of disaster

By 2005, Cleveland says, “The world was on the brink of a food disaster. By 2008, world carryover of oilseeds and grains had disappeared and prices exploded.” In 2010, just as there was a hint of prices settling down a bit, there came Russia’s wheat disaster.”

Cotton stocks were at record levels and frantic demand for grains and oilseeds sent cotton acres plummeting and grain/oilseed acres soaring. Mississippi cotton acres dropped to an all-time low of near 250,000.

But while cotton was taking a back seat in plantings over five years, the surplus in stocks was disappearing and prices were climbing.

“All this says is that economics works,” Cleveland says. “With cotton supplies used up, the market has to catch up with grains and oilseeds. More specifically, the price ratios between the various field crops have come back in line. That is what $1-plus cotton has done.

While the world is no longer on the brink of a food disaster, supplies of commodities remain tight and food prices are at all-time highs, Cleveland says.

“The world cotton supply can’t be rebuilt in a year. Neither can grain and oilseed stocks. Cotton is now on a competitive track for acreage, and will continue so for at least two years, or until all commodities can rebuild supplies.

“The next step will be for more land to be brought into production — and there is plenty of it. But, that will take five to 10 years. In the meantime, cotton will see many more months of the magic dollar sign.”