Low prices cure low prices is a market adage that is often quoted. This statement is rooted in the theory that low prices tend to discourage production and encourage consumption, which leads to tighter supplies and higher prices.

Darrel Good, University of Illinois Extension economist, says, "…low prices are not a cure for low prices. Low prices encourage consumption but they do not, of their own, increase demand." In the past, there was often a supply response to low prices in the form of government acreage reduction programs. This government policy response has been eliminated from current legislation and low prices have not caused producers to reduce planted acreage. "As long as supplies are large, prices will remain low to encourage consumption."

Consumption and demand are often confused. They are not the same. Consumption and price are components of demand. Only by increasing consumption at the same price is demand increased. Marketing newsletters and analysts often refer to increased consumption or heavy use as increased demand--this is really not quite correct. It is just increased consumption and, without a real change in demand or reduced production, won't increase price.

There are positive benefits to increased consumption that could eventually lead to higher prices. When supplies are large, increased consumption uses them up. This prevents ending stocks from becoming even more burdensome. It helps set the stage for supply and demand changes to increase price by not having a large leftover inventory. Then any reduced production or real increases in demand could quickly tighten up supplies and lead to higher prices.

Consumption has been high. USDA expects both new crop corn and soybean use (consumption) to increase to record levels in the next year. However, in spite of this record use, anticipated large production will result in record supplies and ending stocks will increase. The amount of ending stocks and the stocks to use ratios are the key factors to watch. They provide the best clues for price direction. Right now, these are projected to increase. This suggests that lower prices will be needed to use up increased supplies. Low prices may serve as a "treatment" by using up supplies. But, without a reduction in supply or and increase in demand, low prices alone won't "cure" low prices. --Melvin

Decisive Marketing - July 28, 2000
http://outreach.missouri.edu/agconnection/DCT/DM000728.html -- Revised: April 20, 2004
breesm@missouri.edu