What  is the Inflation Adjusted Price of Corn?

Updated- July 16, 2008

by Tim McMahon

Corn has almost quadrupled in price in nominal terms since 2000.

There has been speculation that this dramatic increase in the price of corn is the result of ethanol becoming part of the gasoline mix. 

But obviously that is only part of the equation. The real question is, "What is the price of corn in real (inflation adjusted) terms.

That is exactly what we are going to look at in this article.

In the chart at right, the black line represents the nominal (or actual price) per bushel of corn since 1973. As you can see the nominal price stayed in a defined range of  between $2.00 and $4.00 up until 2006.

But the interesting thing is that when you adjust for inflation you find that the price of corn had actually fallen drastically eventually hurting farmers to the point where they could hardly afford to produce it anymore.

In today's dollars a bushel of corn would have sold for $15.67 in 1974.

It is interesting to note that 1973-4 is when the Arab Oil Embargo occurred. Which drove up oil prices and coincidentally corn prices as well.

So it is not surprising to see corn and other commodity prices rising along with oil.  All commodities rely on oil for production and transportation to some extent (unless you are using oxen to plow your field).  

So you would expect a positive feedback relationship for the price of oil.  But there are other reasons too.  Both oil and corn have become somewhat inter-changeable with the advent of corn based ethanol. 

But an even more important reason is that inflation is primarily a monetary event.  It is caused by an increase in the money supply and as time goes on it spreads evenly over all commodities.  Initially,  corn or oil or pork bellies may rise quicker but as time goes on it levels out somewhat like water flowing to all the various commodities. 

See the article on the Inflation implications of Ethanol for more information.

So up until 2006 we saw a decline in the real (inflation adjusted) price of corn.  But then inflation began to set in and demand increased drastically due to ethanol usage igniting the inflationary flames.