November 2, 1998 (The Editor’s Desk is updated each business day.)
Three factors led to 1996 grain
price shock
In 1996, the producer price index for corn rose 45.4 percent,
soybeans were up 25.1 percent, and wheat prices increased by 15.2 percent. Thus, 1996 met
the rule-of-thumb definition of a grain price shocka 20 percent or greater increase
in the price of at least two of these three key feed grains. Drought in the Midwest and
West, pessimistic crop forecasts, and robust foreign demand affected the magnitude of the
shock.
![Grain supply and demand indicators, percent change from crop year 1994-95 to crop year 1995-96](https://webarchive.library.unt.edu/web/20120921214252im_/http://www.bls.gov/opub/ted/images/1998/Nov/wk1/art01.gif)
[Table dataTXT]
Corn production was perhaps most affected by drought. While 1994-95 had seen a record
high 10.1 billion bushels of corn produced, the crop fell by more than a quarter to 7.4
billion bushels in 1995-96. Corn "disappearance"a term for the total
demand or use of a commodity (including exports)also fell, but by not nearly as
much. As a result, stocks of corn were reduced by nearly 75 percent, speculation
increased, and prices rose sharply.
A similar, but less dramatic, scenario unfolded for soybeans. Production fell 13.5
percent, the rate of disappearance edged down only slightly, and stocks were reduced by
nearly half. Prices rose as the soybean markets reacted to these developments.
The story for wheat was somewhat different. The winter wheat crop emerged poorly in the
fall of 1995, and scant snow cover exposed the emerging wheat to the unusually cold winter
of 1995-96. "Winterkill" was presumed to be extensive and official projections
saw the crop to be too severely damaged to make harvesting cost effective. However, the
actual drop in production was only 6 percent, by far the smallest among the three key
grains, and the reduction of stocks, while significant, was also smaller than for the
other feeds. As a result, the price increases for wheat were somewhat more restrained,
despite the sensitivity of the commodity markets to the anticipation of a shortage.
Prices at the crude commodity stage of production are measured by the Producer Price Index program. More information about the
1996 grain price shock may be found in "The
1996 grain price shock: how did it affect food inflation?", Monthly Labor
Review, August 1998. For a historical look at grain price shocks and their
impact on consumer food prices, see "Impact
of grain price shocks may be lessening," The Editor's Desk.
Of interest
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