Fundamentally Speaking
Joel Karlin DTN Contributing Analyst

Tuesday 11/26/13

New Crop Bean/Corn Ratio History

Despite a record corn harvest that is about complete, the cash market remains very tight supported by good near-term demand and lack of farmer selling linked to a number of factors including dissatisfaction with current prices.

Producers may actually wish for current prices down the road if the situation becomes more bearish given forecasts of larger 2013 crop than currently estimated, ideas that robust demand projections may be overstated, and South American production turns out as good as advertised.

The situation becomes even more tenuous for next year as forward values may be below the estimated 2014 costs of production for some farmers.

The accompanying graphic looks at the new crop soybean-corn ratio going back over a number of years on the day before Thanksgiving and the day before the March prospective plantings reports.

These ratios are contrasted vs. the percent change in corn acreage from the final figure of the year prior to that year’s prospective plantings report that is usually released the final business day of March.

This year the new crop soybean–corn ratio is coming in at 2.55 and that is the fourth highest figure we have in our database going back to 1985 and the highest since 1989 and well above the ten-year average of 2.27.

A general rule of thumb is a ratio at 2.35 or higher will result in a rise in soybean acreage relative to corn and vice-versa.

The current rate would imply a sharp rise in soybean acreage next year compared to corn.

There are many reasons why producers may switch some corn acreage back to soybeans including the increasing desire of farmers in the Eastern Corn belt to move back to more of a corn-bean rotation instead of going continuous corn as has been the case over the past few seasons.

There is also cognizance that corn prices may fall further as the large amount being held in storage comes to market after the first of the year.

Meanwhile despite the making of another huge South American soybean crop, uncertainty has to how well Brazil and Argentina can market that crop has kept Chinese demand for U.S. soybeans quite buoyant.

U.S. farmers may conclude that solid processor and export demand will keep soybean prices well-supported vis-à-vis corn for the foreseeable future.

This is behind talk of 2014 U.S. planted corn area at 92.0 million acres, down sharply from levels seen in 2011 and 2012 while soybean planted area next year will swell to record levels, anywhere from 80-83 million.

Keep in mind that a large drop in corn acreage next year may be forestalled by the large amount of intended corn acreage that did not get in the ground this past spring and tentative 2013 crop budgets indicating corn returns still higher than soybeans though not at the levels seen in recent seasons.

(KA)

Posted at 1:28PM CST 11/26/13
Comments (2)
What is the average soybean/corn ratio.
Posted by WARREN HARDY at 7:29AM CST 11/27/13
The old train of thought for a pre-harvest sale of grain is/was; determine a price that works for your situation, access the risk of that position in terms of the total operation and if needed defend your position as/if your assumptions change. A lot of folks use a cost plus profit to determine the quantity and price level to make those early sales. Others of us are naive enough to try to forecast possible pricing outcomes from historic relationship. (We should all known by now; "Past performance is not indicative of future results." That definitely applies with our model.) The September WASDE report placed a heavy foot print upon 2014-15 (to be planted this spring) corn prices with the large 2013-14 (harvested this past fall) ending stocks. Now that increased corm usage seems to be sustainable into the future crop year. It has caused a need to access the risk of our current position in terms of the total operation. There are many unknowns at this time. The largest probable risk is in World, US and farm corn production. US production is of particular concern for future pricing opportunity. As we all know, especially from the past several years, weather plays a large part in the yield side of the production equation. That risk can be managed- to some degree- with our "natural hedge" and insurance. The success of these two factors in managing that risk will be dependant on planted corn acres. It is interesting to noted, insurance will provide better downside protection with large planted acres while the "natural hedge" will provide better upside protection from smaller planted acres. (This may be a factor in how one's marketing plan is set up.) Many are now forecasting, think and/or hoping 92 million or so acres of corn will be planted this spring. A normal yield, on those acres, with an increasing demand, might keep price in more of a holding pattern than the decline of our expectations. Past acreage/price relationships were "snooped" to find what is needed for 92 million plant corn acres to be planted this spring in the US. ("Snooped" is a term used by University of Illinois's Dr. Irwin to illustrate the potential long and short term uselessness of this technique- a view that is hard to disagree with. It is a good read for those with that kind of interest.) Soybean/corn price ratios were not used in developing the model. But the results can be explained in those terms. The February insurance prices were assumed to be a reliable price trigger for corn or soybean planting decisions. The model's prices and price relationships are set for that time frame. It seems, from the model, that the price ratio of soybeans to corn would need to be greatly skewed from historic relationships. A February soybean price of $11.00 would need a February corn price of $3.81 or less with a resulting ratio of 2.89 or higher ratio for 92 million or less corn acres to occur. An example of other pricing relations that have the same result would be; $12.50 soybeans, $4.46 corn with a 2.80 price ratio and $14.00 soybeans, $5.13 corn with a 2.73 price ratio. If the corn price is below the price indicated for the corresponding soybean price, the model points less than 92 million corn acres planted. Historically, from 2004 to 2013, February's soybean/corn price ratio has ranged from 2.0 to 2.5 with an average of 2.3. It seems logical that the historic relationship would hold for the lower soybean prices. (Meaning more than 92 million corn acres would likely be planted.) A scenario can be envisioned where an ugly (big) January stocks report for corn and a very tight current crop soybean supply versus demand relationship might result in a "new crop" soybean price high enough and corn low enough to trigger the drop in corn acreage. However, it seems unlikely that current year soybean prices could pulled next year's prices that high with such a large South American crop being advertised. The model with current conditions, which are always subject to change, points to around 96 million acres of corn and around 79 million acres of beans. Freeport, IL
Posted by Freeport IL at 2:50PM CST 12/03/13
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