Soybean-Corn Price Ratio Is it Still Relevant? August 15, 2011 Greg Halich 311 CE Barnhart Dept. Agricultural Economics.

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Presentation transcript:

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

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.

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?

Agricultural Economics Thesis: 1) 2.40 ratio has different meaning today vs ) 2.40 ratio may have different meaning in 2012 vs

Agricultural Economics Ratio and Planting Decisions: Need million acres more corn then to soybeans. Need 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.

Agricultural Economics Three Soil Productivity Levels Corn Yield Soybean Yield Corn/Soybean Yield Ratio 150 bu45.5 bu bu51.5 bu bu57.0 bu3.5

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

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.

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

Agricultural Economics Summary Revenues/Costs (per acre) Yield and Price: Cont. Corn Soy- beans Rot. Corn Expected Yield (rotation) 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

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 range. My prediction is that ratio will increase range.

Agricultural Economics Historical Price Ratio: Range Range. Lower ratio favors corn. Lower ratio favors corn. Higher ratio favors soybeans. Higher ratio favors soybeans.

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

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

Agricultural Economics Summary Revenues/Costs (per acre) Yield and Price: Cont. Corn Soy- beans Rot. Corn Expected Yield (rotation) 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

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

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

Agricultural Economics 1998 Revenues/Costs (per acre) Yield and Price: Cont. Corn Soy- beans Rot. Corn Expected Yield (rotation) 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

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

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?

Agricultural Economics Fall in Commodity Prices Yield and Price: Cont. Corn Soy- beans Rot. Corn Expected Yield (rotation) 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

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

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

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

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

Agricultural Economics "Neutral" Price Ratios 2012 Cost Structure N PriceCorn Price $4.20$5.20$6.20$7.20 $ $ $ $

Agricultural Economics "Neutral" Price Ratios 2012 Cost Structure N PriceCorn Price $4.20$5.20$6.20$7.20 $ $ $ $

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