Corn Versus Soybeans The Farmers Option
When it comes to agricultural markets each year is a new adventure. This is because agricultural commodities have a shorter shelf life than other raw materials like metals and minerals which can be stored for years, if not decades. While corn, soybeans and wheat can remain in storage for months and maybe even a few years, these grains deteriorate over time. Therefore, the world depends on fresh new crops each year.
As the United States is the world’s largest producer and exporter of corn and soybeans, each spring farmers plant these crops on their acreage and they often have a choice of which one to plant. In March 2015, I wrote an article on how the price differential between corn and soybeans yields important clues as to which crop farmers will favor when it comes time to put seeds into the ground. The corn-soybean spread serves as an economic guide to farmers and traders alike. The main purpose of a futures market is to give producers and consumers an opportunity to hedge or limit the price risk of their output or requirements. Each year as planting season approaches, farmers watch the price spread between corn and soybeans for future months when the crop harvest will eventually occur. This spread gives farmers a guide as to not only the prices of the two grains but the value of each. Value can be more important than price because it is the ultimate determinate of how best to utilize land.
In other words, this spread will tell farmers which crop will yield the greatest economic benefit.
The article in March of 2015 illustrated that the long-term average for the corn-soybean spread is at the 2.4:1 level or 2.4 bushels of corn value in each bushel of soybean value. As of March 4, 2016 this relationship stood at around 2.35:1.
In the past, when it takes more than 2.4 bushels of corn to purchase one bushel of beans, famers have planted more soybeans than corn. This is because the spread values beans as a move expensive crop on a relative basis. As we approach the beginning of planting season in 2016, the spread is below the 2.4:1 level meaning that corn is a more valuable crop than soybeans. Even though both corn and beans have moved dramatically lower over recent years, farmers always want to plant the crop that has the most value. The choice between corn and soybeans in 2016 seems to favor corn planting.
There are many factors that influence farmers in terms of how they utilize their precious land each year. While prices of all agricultural commodities have moved lower, so have energy prices. One of the major costs of farming is energy as it takes fuel to power tractors and other heavy equipment necessary to plant, grow and harvest agricultural commodities. Lower energy costs means that the breakeven points for the production of both corn and soybeans will be lower in 2016 than it was in 2015 and previous years. Additionally, as energy is one of the most important costs in the production of fertilizers, farmers will pay less for this necessary product in 2016.
Farmers suffer from a catch-22 in terms of their crop output. Prices go higher during years when they have problems, when crop yields are low. Bumper crops cause prices to move lower and that is what we have experienced over the past three crop years. As farmers begin to plant the seeds that will grow into the crops for 2016, whether this year will yield yet another season of bumper crops and increasing inventories or if weather issues will cause shortfalls is something that is difficult, almost impossible to predict at this point in the year. Only Mother Nature knows what the weather will be. However, one thing that is easier to predict is what farmers will plant. As of the beginning of March, the level of the corn-soybean spread tells us that corn is likely to be the favored and dominant crop this year as it is more valuable than soybeans on a relative basis.
This can certainly change with the level of the spread. If soybeans were to appreciate relative to corn before planting is completed this spring, the economics for acreage utilization would change. However, as of the first week of March 2016, economics still favor corn for revenue maximization.