soybean-corn price ratio is it still relevant? august 15, 2011 greg halich...
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Soybean-Corn Price Ratio Is it Still Relevant?
August 15, 2011
Greg Halich859-257-8841Greg.Halich@uky.edu
311 CE Barnhart Dept. Agricultural EconomicsUniversity of KentuckyLexington, KY 40546
Agricultural Economics
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
Soybean Yield
Corn/Soybean Yield Ratio
150 bu 45.5 bu 3.3175 bu 51.5 bu 3.4
200 bu 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.
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 $20 $20
Misc. $20 $20 $20
Land Rent Variable Variable Variable
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) 166.3 51.5 175
Future's Price Fall 2011 $6.20 $12.85 $6.20
Grain Revenue $1031 $662 $1085
Direct Gov’t Payment $20 $20 $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.
• 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
Soy-beans
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
Direct Gov’t Payment $20 $20 $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
• Projected Soybean Price $14.60
• 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 $15 $15
Misc. $20 $20 $20
Land Rent Variable Variable Variable
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) 166.3 51.5 175
Future's Price Fall 2011 $2.25 $5.41 $2.25
Grain Revenue $374 $279 $394
Direct Gov’t Payment $20 $20 $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
• Projected Soybean Price $5.41
• Proj. “Neutral” Ratio 2.41
Agricultural Economics
Back to 2012:
• Current Corn Price $6.20
• 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) 166.3 51.5 175
Future's Price Fall 2011 $5.20 $11.54 $5.20
Grain Revenue $865 $594 $910
Direct Gov’t Payment $20 $20 $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
• 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” 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
• 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.
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