Can Price Ratio Put Brakes On Corn Acreage?

The soybean-to-corn ratio eyed by traders

DES MOINES, Iowa --With wet conditions slowing 2016 corn planting in the U.S. South, combined with a full slate of optimal planting dates available for Midwest farmers, the idea of switching acres is not out of the realm of possibilities.

Now, the farmer has one more key factor supporting acreage shifting: the soybean-to-corn price ratio.

Until this week, the ratio that offers some indication to farmers as to the most profitable crop choice to plant favored corn and soybeans nearly equally.

That pendulum has shifted to soybeans. This comes on the heels of last week’s USDA Prospective Planting Report that showed farmers have corn planting intentions of 93.0 million acres, the third highest since 1944, if realized. The report showed that farmers intend to plant 82.2 million soybean acres.

The USDA Report last week pressured corn prices and underpinned soybean prices. “This helped tip the ratio toward soybeans," Al Kluis, Kluis Commodities, stated in a weekly Successful Marketing newsletter to subscribers. The last two times the ratio was this high in early April were in 2005 and 2012. In both of those years, prices rallied to much higher price and profit levels. You also had a major weather scare each of those years and much better selling opportunities for both corn and soybeans before the harvest lows,” Kluis stated.

For background, the tipping point price ratio for the soybean-to-corn price ratio is 2.3-to-1. “At that ratio of futures prices, farmers would earn about the same profits on either corn or soybeans. If the ratio goes above 2.3, then soybeans are more profitable. If the ratio is below 2.3, corn is more profitable,” Kluis stated.

Right now, the ratio is made up between the November 2016 soybean futures contract price and the December 2016 corn price. On Wednesday, the CME Group's November '16 soybean futures contract closed at $9.22 per bushel, while the December 2016 corn contract finished at $3.71 (a 2.48-to-1 ratio).

When soybean prices bottomed last October at $8.44, the ratio was 2.12-to-1. Corn was definitely more profitable, Kluis says. “But early this week, when November soybeans hit a high at $9.36 per bushel, the ratio was at 2.5-to-1. Using this rule of thumb, soybeans are currently more profitable than corn,” Kluis says.

Alan Brugler, president, Brugler Marketing & Management LLC, says that very few producers look at the ratio directly, but they tend to act in the direction it suggests, based on profitability.

“We are definitely hearing of some producers switching some intended corn to beans in the Midwest, Brugler says. Southern producers are further along with both planting and field prep, while also in some cases sidelined by weather.”

Overall, Southern farmers appear to be taking more of a wait-and-see attitude.

On Tuesday, the USDA released its weekly Crop Progress Report. For the 13 corn-producing states in the South that usually have some corn planted at this time of the year, as of last Sunday, the totals show U.S. corn planting progress is behind. As of Sunday, 19% of the corn was planted vs. a 22% five-year average, for the early planting states.

The USDA rated Mississippi farmers as 19% complete on planting, compared with a 49% five-year average. About 6% of Mississippi’s corn has emerged, as of Sunday. Arkansas farmers have 31% of their corn planted vs. a 36% five-year average. The Razorback state has 6% corn emergence vs. a 9% average.

Kansas and Tennessee farmers are 6% completed on corn planting, ahead of 2% five-year averages. And the USDA rated Missouri corn as 3% planted vs. a 4% five-year average.

Overall, the price ratio captures a portion of the economic relationship between the two crops, but other factors are also considered, according to David Widmar, Agricultural Economic Insights economist at ageconomists.com.

“The price ratio is not a perfect indicator. In 2002 and 2005, the ratio was 2.57-to-1 and 2.46-to-1 and corn acres increased (while soybeans acres decreased). However, it is a simple but useful glimpse into the economic relationship between the two crops,” Widmar says.

Ultimately, several factors will impact producers' final decision, and the ratio only accounts for two data points (the futures price of corn and soybeans), the economist says. 

“Yields, specifically the relative yields of corn and soybeans, are important and can vary by field, for the farm-level decision, and by region. For example, some regions of the country are strong soybean producing regions, relative to corn. Changes in production costs are another factor, this can be especially true in 2016 given the significant decline in fertilizer prices,” Widmar says.

Finally, local cash prices can be important, Widmar says. “If producers are experiencing historically strong basis for a given crop, this can impact their decision.”

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