Agricultural price index

Because the agricultural price index represents the prices of all agricultural products, it closely mirrors the performance of the US economy as a whole. Any idiosyncratic movement of the price of one product is often canceled out by the movement of others. Corn, wheat and soybeans operate as close substitutes on the animal feed market (which is the endpoint for a majority of each crop). While the sheer size of corn production in the United States gives it greater influence over the price index, its overall influence is mitigated by the variety of agricultural products. Moreover, when crop prices increase, feed prices increase, which drives up meat prices (holding demand constant). As a result, rising crop prices can induce generalized inflation in the index to a greater extent than livestock prices (as rising livestock prices do not exert much influence on crop prices); generally speaking, however, the index tends to move when the prices of all goods covered by the index move due to external factors or supply shocks.

One of the main outside drivers of agricultural prices is the price of oil. Both corn and soybeans have increasingly been used more in fuel substitutes in the past decade; corn in ethanol, soybeans in biodiesel. The Energy Independence and Security Act drastically increased quotas for biofuel production in the United States. High oil prices boost the demand for alternative fuels, which drives up the price of corn and soybeans. Furthermore, transportation is a major cost for all agricultural products. As a result, when oil prices rise, the prices of agricultural products are increased to recoup the higher transportation costs. The other key driver of agricultural prices is the strength of the American dollar and general agricultural trade conditions. The United States is a major exporter of many agricultural products, and foreign demand expands when the dollar is weak versus other currencies.

The appreciation of oil prices from 2006 to 2008 greatly expanded the production of corn-based ethanol and soybean-based biodiesel. Indeed, according to the USDA, food, seed and industrial uses account for one-third of domestic corn utilization. As demand and prices increased for corn and soybeans, demand for wheat as an animal feed substitute increased, raising its price as well. The meat supply grew significantly due to accelerated slaughtering rates, but higher transportation costs tempered the resulting price drop for cattle and hogs. This all contributed to the sharp rise in the index from 70.5 in 2006 to 91.5 in 2008.

The global financial crisis in 2008 caused oil prices, the value of foreign currencies versus the dollar and overall demand to drop significantly. These factors led to agricultural prices dipping 11.7% in 2009 before rebounding 7.0% in 2010 once oil prices and demand started improving. High oil prices over 2011, plus adverse weather conditions in farming areas worldwide, drove up the price of all major agricultural products significantly, leading to a 15.7% increase over the year. In 2012, continued strength in oil prices, rising consumption of agricultural products and a drought in the Midwest and Plains Regions of the United States caused the agricultural price index to rise 5.1%. Subsequently, agricultural production normalized as adverse weather conditions subsided. Additionally, in late 2013 the Environmental Protection Agency did not set an increased Renewable Fuel Standard for 2014, breaking the precedent that ethanol and other biofuel production would increase each year. The flat demand from biofuel producers thus alleviated upward pressure on corn and soybean prices.

Increasing meat prices during 2014 due to low cattle herd numbers and a drought in the West pushing up vegetable prices led the agricultural production index to rise further in 2014. Falling oil prices, steady overall inflation and a strengthening US dollar all contributed to the decline in the agricultural price index in the following years, from its high of 110.5 in 2014 to 89.6 in 2016. Also, in 2015, as the production of both crops and livestock products increased, supply constraints eased, leading prices to fall 9.2%. As these trends continued, the agricultural price index declined further in 2016, decreasing 10.7% that year alone. However, the index increased slightly in 2017 as oil prices stabilized and biofuel values improved. For 2019 the metric continued to increase for reasons similar to those in 2017.

In 2020, the agricultural price index increased 5.2% amid the pandemic. Despite lower downstream demand from restaurants and service establishments, a major market for agricultural commodities, a shift in agricultural supply chains toward primarily servicing grocery stores and consumers caused productive congestion, keeping prices more elevated than the decline in aggregate demand would otherwise suggest. Moreover, continued strong demand for soybean exports, primarily because of China's temporary reliance on US soybeans to reform its stock of hogs, helped to keep overall agricultural prices from declining substantially. In 2021, renewed economic growth, consumer spending and demand from service establishments contributed to the index rising 15.9%. Also, further disruptions and issues relating to global food and energy supply chains are expected to place upward pressure on agricultural prices. In 2023, the index decreased after rising by 19.3% in 2022 because of price recovery for crops like corn, soybeans and wheat. This was driven by better U.S. production and decreased demand from China. Prices surged in 2024 because of higher egg costs amid bird flu and increased beef costs because of rising feed prices, which elevated farming expenses. A slight price increase is expected in 2025. However, tariffs might reduce export appeal for U.S. products while benefiting domestic sales. Production costs could rise because of 10.0% tariffs on fertilizers from Qatar, Algeria and Belarus until these are renegotiated, impacting U.S. farmers who rely on these imports.