Kub's Den

Soy vs. Corn: Markets Vote With Dollars

Elaine Kub
By  Elaine Kub , Contributing Analyst
The ratio between the DTN National Soybean Index and the DTN National Corn Index currently sits at 2.33-to-1, at the 26th percentile of all values in the past 10 years. (DTN graphic by Elaine Kub)

While lots of Americans were contemplating the midterm election choice of Democrats versus Republicans (or, hey, don't forget about the third parties and independents!), grain producers here and abroad were already contemplating their 2019 mix of soybeans versus corn. It is planting season in South America, as well as seed buying and fall fertilizer application season in North America, so it's a prime moment for the futures markets to speak up and communicate their priorities for the coming year.

In their latest batch of long-term projections released Friday, Nov. 2, USDA economists indicated a clear expectation for "King Corn" to regain its title as the most widely-planted crop in the nation. After the 2018 switcheroo when we harvested more soybean acres than corn acres, next year's corn planted acreage is expected to rise 3.3% and reach 92 million acres in 2019. Soybean-planted acreage, unsurprisingly given the current export environment, is expected to fall 7.4% and reach only 82.5 million acres in 2019. These are very preliminary economic estimates, of course. They're not necessarily based on grain producers' sentiment or actual decisions yet, but any economist or market analyst can look at the futures prices for these two commodities and see a pretty blatant signal. The market wants fewer American soybeans in 2019, especially if there still won't be anywhere to sell those beans.

Just looking at nearby soybean and corn futures in the past 10 years, the average soybean-to-corn price ratio has been 2.50-to-1. That is to say: a bushel of soybeans, given all its energy and protein and oil content, is typically worth two and half times as much money as the same volume of corn.

Looking at the actual cash values offered to farmers for spot-priced soybeans or corn over that same time period, via the DTN National Soybean Index (a daily average of cash prices across the country) and the DTN National Corn Index, we see a similar fundamental relationship. The cash soybean-to-corn price ratio has averaged 2.59-to-1 the past 10 years.

The average cash bid for soybeans on Monday was $7.85 per bushel and the average cash bid for corn was $3.37, making the current soybean-to-corn price ratio 2.33-to-1. That shows soybeans are worth less than usual, in comparison to corn. The metric has ranged anywhere from 1.74-to-1 during the ethanol frenzy of 2007, or as wide as 3.87-to-1 during July 2004. Its current level is at the 26th percentile of the values in the past 10 years -- a noteworthy movement away from the norm. Soybeans were more highly valued this past spring (2.85-to-1 in March 2018) before the trade war rhetoric began, and last fall (3.00-to-1 in November 2017), when global soybean demand looked so promising.

Grain producers shouldn't be making decisions for next year based on today's spot prices, of course. But the 2019 new-crop futures contracts show a similar relationship: $9.33 per bushel for November 2019 soybean futures and $4.04 per bushel for December 2019 corn futures, or a 2.31-to-1 price ratio.

As might be expected, the numbers are more favorable in Brazil, at least when it comes to the relative price ratio between soybeans and corn. Local bids for the two crops in the interior of the country currently show soybean-to-corn price ratios more like 3.00-to-1. The market wants to buy the small supplies of old-crop soybeans that are left inside the country, and merchandisers would happily pass them along to China, tariff-free. During their ongoing planting season, Brazilian farmers are expected to increase their soybean acreage approximately 2% over last year's crop, taking it above 88 million acres. Their full-season corn plantings are expected to increase more than 2% year-on-year, leading to more than 12 million acres of full-season corn. Then the safrinha corn crop should be seen on more than 28 million acres next year.

The acreage mix is more flexible than we realized. In 2018, U.S. farmers demonstrated a willingness to abandon their typical 50/50 crop rotation in favor of soybean acreage, since that's where the money was (at the time). In 2019, things could easily swing back in the other direction. Some producers might be hoping for additional tariff aid in 2019 to influence their soybean profitability projections (or unprofitability projections). But that's an uncertainty and a personal political judgment, not something the grain markets themselves can help a producer decide.

So far, using just the pure price ratio as a guide, the markets seem to be directing farmers toward planting more corn than soybeans in 2019. Consider the current 2019 new-crop futures prices: $4.04 for corn and $9.33 for soybeans. At those levels, 176.5 bushels per acre of corn would result in $713 of projected revenue (ignoring local basis and of course ignoring the twelve months of market volatility that will occur between now and the next harvest), while 50 bushels per acre of soybeans would result in $467 of projected revenue, although admittedly with lower input costs.

Grain producers are negotiating with their seed salesmen and "voting" with their own dollars already this fall. And, hey, don't forget about the "third party" crop, wheat or other specialty crop opportunities.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(BAS/BE)

Elaine Kub