Soybean-Corn Price Ratio
Is it Still Relevant?
August 15, 2011
Greg Halich
859-257-8841
Greg.Halich@uky.edu
311 CE Barnhart
Dept. Agricultural Economics
University of Kentucky
Lexington, KY 40546
Why is the Ratio Important?
Farmers:
• Help w/planting decisions.
Traders:
• Indicator prices out of balance.
→ New CME option.
Agricultural Economics
Typical Ratio (pre-2005)?
• Neutral.
• Favors Corn Production.
• Favors Soybean Production.
Fundamental Question: Is this still
valid?
Agricultural Economics
Thesis:
1) 2.40 ratio has different meaning
today vs. 1998.
2) 2.40 ratio may have different
meaning in 2012 vs. 2013.
Agricultural Economics
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.
Agricultural Economics
Three Soil Productivity Levels
Corn
Yield
150 bu
175 bu
200 bu
Soybean Corn/Soybean
Yield
Yield Ratio
45.5 bu
3.3
51.5 bu
3.4
57.0 bu
3.5
Agricultural Economics
August 2011: What CME contract(s)
relevant at this point?
Agricultural Economics
• August 2011
•
→ New Crop 2012
February 2011
→ New Crop 2011
Once crop is planted need to move to
following year.
Agricultural Economics
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
Drying Grain
$23
$0
$24
Crop Insurance
$20
$20
$20
Misc.
$20
$20
$20
Variable
Variable
Variable
$14
$8
$14
Total Other
$77
$48
$78
Total Costs
$486 + Rent
$265+ Rent
$481 + Rent
Other:
Land Rent
Operating Interest
Summary Revenues/Costs (per acre)
Yield and Price:
Cont.
Corn
Soybeans
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
$20
$20
$20
$1051
$682
$1105
Total Costs (Less Rent)
$486
$265
$481
Gross Return (Less Rent)
$565
$417
$624
Direct Gov’t Payment
Total Revenue
Agricultural Economics
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.
Agricultural Economics
Historical Price Ratio:
• 2.30-2.50 Range.
• Lower ratio favors corn.
• Higher ratio favors soybeans.
Agricultural Economics
New Era Price Ratio
“Neutral” Ratio Will Change:
• Relative commodity prices.
• Relative input costs.
Agricultural Economics
Estimate “Neutral” Ratio 2012
• Constant corn price.
• Soybean price changes
→ Profit cont. corn = rotation.
Agricultural Economics
Summary Revenues/Costs (per acre)
Yield and Price:
Cont.
Corn
Soybeans
Rot.
Corn
Expected Yield (rotation)
166.3
51.5
175
Future's Price Fall 2011
$6.20
$14.60
$6.20
Grain Revenue
$1031
$752
$1085
$20
$20
$20
$1051
$772
$1105
Total Costs (Less Rent)
$486
$265
$481
Gross Return (Less Rent)
$565
$507
$624
Direct Gov’t Payment
Total Revenue
Agricultural Economics
Results 2012:
• Current Price Ratio
• Projected Soybean Price
• Projected “Neutral” Ratio
Agricultural Economics
2.07
$14.60
2.35
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
$64
$45
$65
Drying Grain
$12
$0
$12
Crop Insurance
$15
$15
$15
Misc.
$20
$20
$20
Variable
Variable
Variable
$6
$5
$6
Total Other
$53
$40
$54
Total Costs
$233 + Rent
$159+ Rent
$232 + Rent
Machinery and Labor
Other:
Land Rent
Operating Interest
1998 Revenues/Costs (per acre)
Yield and Price:
Cont.
Corn
Soybeans
Rot.
Corn
Expected Yield (rotation)
166.3
51.5
175
Future's Price Fall 2011
$2.25
$5.41
$2.25
Grain Revenue
$374
$279
$394
$20
$20
$20
Total Revenue
$394
$299
$414
Total Costs (Less Rent)
$233
$159
$232
Gross Return (Less Rent)
$161
$140
$182
Direct Gov’t Payment
Agricultural Economics
Results 1998:
• Corn Price
• Projected Soybean Price
• Proj. “Neutral” Ratio
Agricultural Economics
$2.25
$5.41
2.41
Back to 2012:
• Current Corn Price
• Projected “Neutral” Ratio
$6.20
2.35
What happens if commodity prices
fall?
Agricultural Economics
Fall in Commodity Prices
Yield and Price:
Cont.
Corn
Soybeans
Rot.
Corn
Expected Yield (rotation)
166.3
51.5
175
Future's Price Fall 2011
$5.20
$11.54
$5.20
Grain Revenue
$865
$594
$910
$20
$20
$20
Total Revenue
$885
$614
$930
Total Costs (Less Rent)
$486
$265
$481
Gross Return (Less Rent)
$399
$349
$449
Direct Gov’t Payment
Agricultural Economics
Results 2012 Lower Comm Prices:
• Corn Price
$5.20
• Projected Soybean Price $11.54
• Orig. “Neutral” Ratio
2.35
• Proj. “Neutral” Ratio
2.22
Agricultural Economics
Results 2012 Higher Comm Prices:
• Corn Price
$7.20
• Projected Soybean Price $17.66
• Orig. “Neutral” Ratio
2.35
• Proj. “Neutral” Ratio
2.45
Agricultural Economics
Back to 2012 Base Scenario:
• Current Corn Price
$6.20
• Projected “Neutral” Ratio
2.35
What happens if input price increase?
N increases $.50/unit to $.70/unit
Agricultural Economics
Results 2012 Inc. N Prices:
N increases $.50/unit to $.70/unit
• Corn Price
$6.20
• Projected Soybean Price $13.75
• Orig. “Neutral” Ratio
2.35
• Proj. “Neutral” Ratio
2.22
N increase ≈ $35/acre
Agricultural Economics
"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
Agricultural Economics
"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
Agricultural Economics
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.
Agricultural Economics