Will the market really pay for all those extra soybean acres?
Are you planning more soybean acres this year, as the market anticipates? Are you undecided? Are you staying with a normal corn and soybean rotation that is guided by agronomic issues, rather than market prices? Probably one third of those offering an answer will fall into each category. While fertility, disease, and insect pest pressures may dictate your acreage decision, those who are planting more soybeans or are undecided may need to work with the market more than usual this year. Just because current prices may favor soybeans that may not always be the case when it comes times to take it to town.
Commodity prices have not only fallen from the past several years, but the relationships between corn and soybean prices have also changed over time. If you ordered seed corn and seed beans based on the 2.46 price ratio offered by the crop insurance guarantees, you were obviously planning to net $4.62 for your corn and $11.36 for your soybeans. And it turns out that the 2.46 price ratio was well above the ratio of the past 15 years.
University of Illinois Farm Management Specialist Gary Schnitkey says there have been two distinct periods of time in the evolution of using corn and soybean price ratios to guide acreage. From 1972 to 1998 the soybean to corn price ratio averaged 2.40. Since 1998, the ratio has average 2.20. Because the ratio was lower, corn had a higher value, and corn acreage expanded 23%, while soybean acreage expanded only 4%.
Schnitkey says the 2.46 soybean to corn ratio reflected by the crop insurance guarantee this year is relatively high, exceeded only by the 2.47 ratio of 2008. In that year, corn acreage dropped by 8% and soybean acres increased by 17%. Whether we will see such a dramatic shift this year remains to be seen.
Although acreage intentions will be reported by USDA on March 31, actual planted acreage will not be confirmed until the end of June. In the interim, prices may change substantially. One crop or another may try to bid up prices and buy acres, or the price of one crop may decline, and pull the other down with it. Since we have shifted from a demand to a supply market, the latter is more likely the case. That makes it more incumbent for farmers to match their seed purchase decisions with a corresponding forward sale before any premiums disappear due to the Planting Intentions report.
Those things happen, says Schnitkey, who says, “The relationship at harvest will be important in the final determination of relative returns.” Schnitkey looked at the relationship between corn and soybean price ratios in the spring and the fall, using projected crop insurance guarantees and harvest prices. He says, “There is some correlation between projected and harvest soybean-to-corn price ratios (.28 correlation coefficient). Higher harvest price ratios tend to be associated with higher projected ratios; however, there is considerable variability. A wide range of harvest ratios occur near 2.46, suggests that harvest ratios can vary from projected ratios.”
Schnitkey’s recommendation is that, “Relative prices at harvest could differ from those in the spring. This suggests that farmers switching acres this spring should consider locking in some of the return difference through marketing contracts. It also suggests making acreage changes based strictly on relative prices may not result in the acreage mix that optimizes profits. Longer run rotational and yield considerations should enter into planting decisions.”
The crop insurance spring guarantee was a ratio that pointed to the market wanting more soybeans than corn. Farmers, who are going to plant more soybeans, should do so in conjunction with marketing contracts that take advantage of the current premium. Such price ratios can change during the course of the growing season, and fall delivery prices may end up being different than what had been planned in the spring.
Source: Farmgate Blog
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