Soybean/corn price ratio eyed
The soybean/corn price ratio reached a long time high after the May 10 crop report at 2.7. However, that historically high ratio quickly crashed, as there are a number of factors that made the bullish USDA soybean numbers no longer relevant.
The following comments were posted on May 11th on our daily market commentary, and have shown to be very prophetic in explaining why soybeans have dropped so hard, relative to wheat and corn the past week:
The USDA bullish soybean numbers are all outdated as of April 1, as the projected soybean acreage of 73.9 million acres was based on another 8 million acres of prevent plant being used, and a normal maturing winter wheat crop. With the rally in Nov. soybean prices of $1 since then and a break in Dec. corn prices of 75 cents, it's likely that as much as 2-4 million acres more of soybeans will be planted than was indicated in the March 1 based report.
Pro Ag expects 2 million more soybean acres from the Prevent planted
acreage (and more acres of corn and HRS wheat, too), and perhaps another 1 million from additional double cropped acreage for a total of 76.9 million or more acres actually planted. Most of those acres will be planted by next Monday, with an early planted soybean crop likely to outproduce 'trend' yields of 43.9 bu (that USDA is currently using) by as much as .25 bu/acre. Net, that would mean 120 million bu more production from the extra acreage, and another 20 mb production due to early planting that would hike the carryout 140 mb or essentially double it from the 145 mb currently projected.
Soybean prices are grossly overpriced for 2012 at that clip, and so speculators should sell aggressively the Nov.12 soybean contract by selling Nov futures, and also buying Nov. $10-13 puts aggressively. We would suggest a play of selling short futures on half your margin money, and buying puts on the other half by buying a ratio of 1 $13 put, 5 $12 puts, 10 $11 puts, and 20 $10 puts. Pro Ag believes that by harvest, Nov. soybeans could drop to $9 or below, and all of these puts could have significant value by harvest.
On the other hand, the corn/soybean price ratio as of yesterday's close was near 2.7 - a historically large ratio that will not hold! The whole world was making planting decisions on oilseeds vs. feedgrains and wheat this spring at this historically high soybean/corn price ratio, and it will attract significant oilseed acreage (much more so than the USDA March 1 conditions suggested). There will be much more oilseed acreage in the world than currently projected, and the oilseed/soybean price is too high relative to the corn/feedgrain price ratio.