by David A. Widmar
As fall harvest begins attention will start to focus on 2016. Early glimpses of what next spring might have in store are beginning to emerge. While a lot can (and likely will) change before planters head to the fields, 2016 is shaping up to be less favorable to soybean production. To examine further, we looked at the latest Purdue University crop budget estimates.
Soybean Prices Lower
Prices are an important driver of farm-level decisions on whether to plant more acres of corn or soybeans. In the 2016 budget estimates, corn prices are $0.10 per bushel lower than 2015 ($3.80/bushel compared to $3.90/bushel in 2015). For soybeans, however, the budgeted price is $1.00 per bushel lower ($8.40/bushel compared to $9.40/bushel in 2015). This is a key reversal of conditions that favored soybeans in 2015 and lead to a bump in soybean acres across the country.
Price dynamics are often captured by the soybean to corn price ratio, shown in figure 1. As would be expected, an 11% drop in soybean prices and 3% decline in corn prices results in a ratio that is less favorable for soybeans. The current price ratio is for soybeans 2.21 times the price of corn, well below the period average of 2.35. The ratio in 2015 was 2.41.
Across 16 years of budget data, the price ratio has been lower than 2016 levels 4 times (2007, 2009, 2012, & 2013). Overall, the current price ratio would indicate conditions beginning to favor corn production in 2016.
Figure 1. Soybean to Corn Price Ratio from Purdue Crop Budgets, 2001-2016. Source: Purdue Crop Budgets.
Relative Contribution Margins
While commodity prices drive revenue expectations, costs should also be considered. The contribution margin represents what is left after all variable expenses (seed, fertilizer, crop protection, etc.) are paid. Contribution margins measure what is available to cover fixed expenses (such as land, machinery, labor, & family living) and generate an economic profit.
The budgeted contribution margin for corn is $198, compared to $204 for soybeans. Overall, the contribution margin for corn and soybeans are looking very similar in 2016; this is a significant switch from a $50 per acre advantage soybeans held in 2015.
To consider the relationship between the contribution margins of soybeans and corn over time the soybean/corn contribution margin proportion is shown in figure 2. A higher value reflects a higher contribution margin from soybeans relative to corn; a lower ratio reflects a higher return with corn production. The current ratio is estimated at 103% ($204/$198), above the period average of 98% (shown in green) and reflective of an advantage with soybeans, but much smaller than 2015.
Figure 2. Budgeted Soybean to Corn Margin Proportion from Purdue Crop Budgets, 2001-2016. Source: Purdue Crop Budgets.
Wrapping it up
While much attention will be given to the overall low commodity prices, the relationship of corn and soybeans prices will be important to monitor heading into the spring. Currently, the soybean to corn price ratio is low and would signal a favor to corn. However, the contribution margin for soybeans is slightly higher than corn and, in relative measures, slightly above the long-run average. At this point, it appears the trade-off between corn and soybeans is about equal. However these conditions will likely shift.
Headed into the winter and spring, the market and producers will carefully monitor these trends. Input prices, especially fertilizer, will also play an important role into how significant a crops financial advantage might be in 2016. Producers that can aggressively reduce their costs in 2016 will likely find corn more attractive for their operation.
It is important to keep in mind, however, that estimated contribution margins for both corn and soybeans are not high enough to generate economic profits in 2016. Budgeted land cash rents are $213 per acre alone; the contribution margins of both crops ($198 for corn and $204 for corn) will be short of covering the full economic cost of land, machinery ownership, labor, and family living. Cost reduction will again be important in 2016.
Photo by Johnny Klemme