1. Soybean-Corn Price Ratio Is it Still Relevant? August 15, 2011 Greg Halich 859-257-8841Greg.Halich@uky.edu 311 CE Barnhart Dept. Agricultural Economics University of Kentucky Lexington, KY 40546

2. Agricultural Economics Why is the Ratio Important? Farmers: Help w/planting decisions. Help w/planting decisions. Traders: Indicator prices out of balance. Indicator prices out of balance. → New CME option.

3. Agricultural Economics Typical Ratio (pre-2005)? Neutral. Neutral. Favors Corn Production. Favors Corn Production. Favors Soybean Production. Favors Soybean Production. Fundamental Question: Is this still valid?

4. 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.

5. Agricultural Economics Ratio and Planting Decisions: Need 10-15 million acres more corn then to soybeans. Need 10-15 million acres more corn then to soybeans. → Need continuous corn acres. → Better productivity ground. Evaluate continuous corn vs. rotational soybeans. Evaluate continuous corn vs. rotational soybeans.

6. Agricultural Economics Three Soil Productivity Levels Corn Yield Soybean Yield Corn/Soybean Yield Ratio 150 bu45.5 bu3.3 175 bu51.5 bu3.4 200 bu57.0 bu3.5

7. Agricultural Economics August 2011: What CME contract(s) relevant at this point?

8. Agricultural Economics August 2011 August 2011 → New Crop 2012 February 2011 February 2011 → New Crop 2011 Once crop is planted need to move to following year.

9. 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 Misc.$20 Land RentVariable Operating Interest$14$8$14 Total Other$77$48$78 Total Costs$486 + Rent$265+ Rent$481 + Rent

10. Agricultural Economics Summary Revenues/Costs (per acre) Yield and Price: Cont. Corn Soy- beans Rot. Corn Expected Yield (rotation)166.351.5175 Future's Price Fall 2011$6.20$12.85$6.20 Grain Revenue$1031$662$1085 Direct Gov’t Payment$20 Total Revenue$1051$682$1105 Total Costs (Less Rent)$486$265$481 Gross Return (Less Rent)$565$417$624

11. Agricultural Economics Planting Implications 2012: Would probably get a flood of corn acres at the expense of soybeans. Would probably get a flood of corn acres at the expense of soybeans. Current price ratio = 2.07 Current price ratio = 2.07 My prediction is that ratio will increase 2.25-2.30 range. My prediction is that ratio will increase 2.25-2.30 range.

12. Agricultural Economics Historical Price Ratio: 2.30-2.50 Range. 2.30-2.50 Range. Lower ratio favors corn. Lower ratio favors corn. Higher ratio favors soybeans. Higher ratio favors soybeans.

13. Agricultural Economics New Era Price Ratio “Neutral” Ratio Will Change: Relative commodity prices. Relative commodity prices. Relative input costs. Relative input costs.

14. Agricultural Economics Estimate “Neutral” Ratio 2012 Constant corn price. Constant corn price. Soybean price changes Soybean price changes → Profit cont. corn = rotation.

15. Agricultural Economics Summary Revenues/Costs (per acre) Yield and Price: Cont. Corn Soy- beans Rot. Corn Expected Yield (rotation)166.351.5175 Future's Price Fall 2011$6.20$14.60$6.20 Grain Revenue$1031$752$1085 Direct Gov’t Payment$20 Total Revenue$1051$772$1105 Total Costs (Less Rent)$486$265$481 Gross Return (Less Rent)$565$507$624

16. Agricultural Economics Results 2012: Current Price Ratio 2.07 Current Price Ratio 2.07 Projected Soybean Price $14.60 Projected Soybean Price $14.60 Projected “Neutral” Ratio2.35 Projected “Neutral” Ratio2.35

17. 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 Misc.$20 Land RentVariable Operating Interest$6$5$6 Total Other$53$40$54 Total Costs$233 + Rent$159+ Rent$232 + Rent

18. Agricultural Economics 1998 Revenues/Costs (per acre) Yield and Price: Cont. Corn Soy- beans Rot. Corn Expected Yield (rotation)166.351.5175 Future's Price Fall 2011$2.25$5.41$2.25 Grain Revenue$374$279$394 Direct Gov’t Payment$20 Total Revenue$394$299$414 Total Costs (Less Rent)$233$159$232 Gross Return (Less Rent)$161$140$182

19. Agricultural Economics Results 1998: Corn Price $2.25 Corn Price $2.25 Projected Soybean Price $5.41 Projected Soybean Price $5.41 Proj. “Neutral” Ratio 2.41 Proj. “Neutral” Ratio 2.41

20. Agricultural Economics Back to 2012: Current Corn Price $6.20 Current Corn Price $6.20 Projected “Neutral” Ratio2.35 Projected “Neutral” Ratio2.35 What happens if commodity prices fall?

21. Agricultural Economics Fall in Commodity Prices Yield and Price: Cont. Corn Soy- beans Rot. Corn Expected Yield (rotation)166.351.5175 Future's Price Fall 2011$5.20$11.54$5.20 Grain Revenue$865$594$910 Direct Gov’t Payment$20 Total Revenue$885$614$930 Total Costs (Less Rent)$486$265$481 Gross Return (Less Rent)$399$349$449

22. Agricultural Economics Results 2012 Lower Comm Prices: Corn Price $5.20 Corn Price $5.20 Projected Soybean Price $11.54 Projected Soybean Price $11.54 Orig. “Neutral” Ratio 2.35 Orig. “Neutral” Ratio 2.35 Proj. “Neutral” Ratio 2.22 Proj. “Neutral” Ratio 2.22

23. Agricultural Economics Results 2012 Higher Comm Prices: Corn Price $7.20 Corn Price $7.20 Projected Soybean Price $17.66 Projected Soybean Price $17.66 Orig. “Neutral” Ratio 2.35 Orig. “Neutral” Ratio 2.35 Proj. “Neutral” Ratio 2.45 Proj. “Neutral” Ratio 2.45

24. Agricultural Economics Back to 2012 Base Scenario: Current Corn Price $6.20 Current Corn Price $6.20 Projected “Neutral” Ratio2.35 Projected “Neutral” Ratio2.35 What happens if input price increase? N increases $.50/unit to $.70/unit

25. Agricultural Economics Results 2012 Inc. N Prices: N increases $.50/unit to $.70/unit Corn Price $6.20 Corn Price $6.20 Projected Soybean Price $13.75 Projected Soybean Price $13.75 Orig. “Neutral” Ratio 2.35 Orig. “Neutral” Ratio 2.35 Proj. “Neutral” Ratio 2.22 Proj. “Neutral” Ratio 2.22 N increase ≈ $35/acre

26. Agricultural Economics "Neutral" Price Ratios 2012 Cost Structure N PriceCorn Price $4.20$5.20$6.20$7.20 $0.302.222.382.492.57 $0.502.022.222.352.45 $0.701.822.062.222.33 $0.901.611.892.082.22

27. Agricultural Economics "Neutral" Price Ratios 2012 Cost Structure N PriceCorn Price $4.20$5.20$6.20$7.20 $0.302.222.382.492.57 $0.502.022.222.352.45 $0.701.822.062.222.33 $0.901.611.892.082.22

28. Agricultural Economics Take-Home Messages Price Ratio Still Relevant, But: General Rule-of-Thumbs obsolete. General Rule-of-Thumbs obsolete. → E.g. 2.30-2.50 “Neutral” price ratio can change each year. “Neutral” price ratio can change each year. → Need to evaluate each year. → Need to evaluate each year.