Corn versus Soybeans: The Farmer's Choice
The value relationship between corn and soybeans is an inter-commodity spread. An inter-commodity spread is one in which one commodity can be substituted or interchanged for another. The United States is the number one producer of both corn and soybeans in the world. The U.S. is also the world's largest exporter of the grains. Corn and soybeans can grow in the same climate; therefore farmers often have a choice of which crop to plant.
As winter gives way to spring farmers prepare to plow and fertilize their acreage for seeding. They then tend to the growing crops through spring and summer, eventually harvesting the grains in the fall. The crop cycle repeats itself each year. Of course, Mother Nature plays a role; the weather ultimately dictates the success or failure of each crop.
In late February or early March each year, farmers in the U.S. make up their minds as to which crop they will plant on their acreage -- corn or soybeans. They do not flip a coin; often they use empirical data to make this important decision. In order to make a wise decision, farmers look at new crop prices for both soybeans and corn. When understanding the crop cycles there are two crops, old crop, and new crop. Old crop refers to crops that sit in inventory or those that are growing. On the futures market, the nearby delivery months including March, May, June, July, August and September are old crop months.
The new crop month for soybeans is November, for corn it is December. Therefore, farmers will analyze the new crop November soybean futures price versus the new crop December corn futures price. A comparison of these two prices will help the farmer to understand which crop will yield the best economic result for their acreage.
Famers are business people. They seek to optimize each acre of land they own or lease. Their goal is to plant crops on each acre that yields the highest profit possible. One of the tools that farmers use to establish relative value is the long-term price relationship between these two grains. The corn-soybean ratio is simply the number of bushels of corn value in each bushel of soybean value.
The monthly chart of the corn-soybean spread illustrates that when the spread is above 2.4:1 soybeans are historically expensive relative to corn. Therefore, farmers tend to plant more soybeans as that grain will yield greater profits. When the spread is below 2.2:1 corn is historically expensive relative to soybeans. At those times, farmers tend to plant more corn as corn is the grain that will yield more profit. A look back over recent years illustrates how this relationship works.
In 2012, the U.S. suffered a terrible drought; many crops were destroyed or unable to grow under the dry conditions. When harvest time arrived, shortages caused the price of all grains to move sharply higher. While all grain prices appreciated, the shortage created in the corn market sent the agricultural commodity to new all-time highs of almost $8.50 per bushel in August 2012.
When it came time for planting season in 2013, the corn-soybean ratio was below 2.2:1; in fact, it was below 2:1. Corn was more expensive than soybeans and farmers planted more corn in 2013. This created a shortage of soybeans the following year, and the ratio moved up above 3:1 as the shortage caused soybean value to appreciate. In 2014, farmers planted more soybeans and the ratio adjusted back down towards historically normal levels.
As I write, we are in the beginning of March 2015. Some farmers are once again making their annual decision -- corn or soybeans. The daily chart of the new crop November soybeans versus December corn spread points to the data that farmers are looking at. As the chart illustrates, the new crop corn-soybean ratio or spread traded at exactly 2.3867:1 as of the date of this particular snapshot of market prices.
That level was within the normal long-term range. This tells us that while in 2014 farmers planted more soybeans that corn because of the relative value, the same will not happen in 2015. Farmers will likely plant a smaller soybean crop in 2015 than they did in 2014.
The planting season of 2017
In March 2017 at the very beginning of the crop year, the corn-soybean ratio or value relationship between the oilseed and grain in the prices of November soybeans divided by December corn stood at the 2.6:1 level making soybeans a more valuable crop for farmers. Therefore, it is likely that farmer will favor planting beans over corn which could result in a decline in corn inventories in the future which may support the price of corn.
The corn-soybean spread is a valuable tool used by farmers and traders to establish relative value between the two grains. This inter-commodity spread can provide clues as to the future direction of each grain at times.