Soybean-Corn Price Ratio Is it Still Relevant? August 15, 2011 Greg Halich...

Soybean-Corn Price Ratio Is it Still Relevant?

August 15, 2011

Greg [email protected]

311 CE Barnhart Dept. Agricultural EconomicsUniversity of KentuckyLexington, KY 40546

Agricultural Economics

Why is the Ratio Important?

Farmers:

• Help w/planting decisions.

Traders:

• Indicator prices out of balance.

→ New CME option.


Typical Ratio (pre-2005)?

• Neutral.

• Favors Corn Production.

• Favors Soybean Production.

Fundamental Question: Is this still valid?


Thesis:

1) 2.40 ratio has different meaning today vs. 1998.

2) 2.40 ratio may have different meaning in 2012 vs. 2013.


Ratio and Planting Decisions:

• Need 10-15 million acres more corn then to soybeans.

→ Need continuous corn acres.

→ Better productivity ground.

• Evaluate continuous corn vs. rotational soybeans.


Three Soil Productivity Levels

Corn Yield

Soybean Yield

Corn/Soybean Yield Ratio

150 bu 45.5 bu 3.3175 bu 51.5 bu 3.4

200 bu 57.0 bu 3.5


August 2011: What CME contract(s) relevant at this point?


• August 2011

→ New Crop 2012

• February 2011

→ New Crop 2011

Once crop is planted need to move to following year.

Projected 2012 Costs (per acre)

Inputs: Cont. Corn

(166.3 bu)Soybeans (51.5 bu)

Rot. Corn (175 bu)

Seed $76 $45 $76

Nitrogen $95 $0 $85

P, K, and Lime $79 $61 $82

Pesticides $35 $25 $35

Total Inputs $285 $131 $278

Machinery and Labor $124 $86 $125

Other:

Drying Grain $23 $0 $24

Crop Insurance $20 $20 $20

Misc. $20 $20 $20

Land Rent Variable Variable Variable

Operating Interest $14 $8 $14

Total Other $77 $48 $78

Total Costs $486 + Rent $265+ Rent $481 + Rent


Summary Revenues/Costs (per acre)

Yield and Price:Cont.Corn

Soy-beans

Rot.Corn

Expected Yield (rotation) 166.3 51.5 175

Future's Price Fall 2011 $6.20 $12.85 $6.20

Grain Revenue $1031 $662 $1085

Direct Gov’t Payment $20 $20 $20

Total Revenue $1051 $682 $1105

Total Costs (Less Rent) $486 $265 $481

Gross Return (Less Rent) $565 $417 $624


Planting Implications 2012:

• Would probably get a flood of corn acres at the expense of soybeans.

• Current price ratio = 2.07

• My prediction is that ratio will increase 2.25-2.30 range.


Historical Price Ratio:

• 2.30-2.50 Range.

• Lower ratio favors corn.

• Higher ratio favors soybeans.


New Era Price Ratio

“Neutral” Ratio Will Change:

• Relative commodity prices.

• Relative input costs.


Estimate “Neutral” Ratio 2012

• Constant corn price.

• Soybean price changes

→ Profit cont. corn = rotation.


Summary Revenues/Costs (per acre)


Soy-beans

Rot.Corn









Results 2012:

• Current Price Ratio 2.07

• Projected Soybean Price $14.60

• Projected “Neutral” Ratio2.35

Projected 1998 Costs (per acre)

Inputs: Cont. Corn

(166.3 bu)Soybeans (51.5 bu)

Rot. Corn (175 bu)

Seed $29 $25 $29

Nitrogen $29 $0 $29

P, K, and Lime $29 $24 $30

Pesticides $35 $25 $35

Total Inputs $116 $74 $114

Machinery and Labor $64 $45 $65

Other:

Drying Grain $12 $0 $12

Crop Insurance $15 $15 $15

Misc. $20 $20 $20

Land Rent Variable Variable Variable

Operating Interest $6 $5 $6

Total Other $53 $40 $54

Total Costs $233 + Rent $159+ Rent $232 + Rent


1998 Revenues/Costs (per acre)


Soy-beans

Rot.Corn









Results 1998:

• Corn Price $2.25


• Proj. “Neutral” Ratio 2.41


Back to 2012:

• Current Corn Price $6.20


What happens if commodity prices fall?


Fall in Commodity Prices


Soy-beans

Rot.Corn









Results 2012 Lower Comm Prices:



• Orig. “Neutral” Ratio 2.35



Results 2012 Higher Comm Prices:






Back to 2012 Base Scenario:

• Current Corn Price $6.20


What happens if input price increase?

N increases $.50/unit to $.70/unit


Results 2012 Inc. N Prices:

N increases $.50/unit to $.70/unit





N increase ≈ $35/acre


"Neutral" Price Ratios 2012 Cost Structure

N Price Corn Price

$4.20 $5.20 $6.20 $7.20

$0.30 2.22 2.38 2.49 2.57

$0.50 2.02 2.22 2.35 2.45

$0.70 1.82 2.06 2.22 2.33

$0.90 1.61 1.89 2.08 2.22


Take-Home Messages

Price Ratio Still Relevant, But:

• General Rule-of-Thumbs obsolete.

→ E.g. 2.30-2.50

• “Neutral” price ratio can change each year.

→ Need to evaluate each year.

Soybean-Corn Price Ratio Is it Still Relevant? August 15, 2011 Greg Halich...

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