Most U.S. farmers will not begin sowing corn and soybeans for another month or two, but new-crop futures prices in February factor heavily in decisions on which crop to plant.
The U.S. Department of Agriculture (USDA) has penciled in 90 million planted acres of corn and 85.5 million planted acres of soybeans to U.S. balance sheets for 2017. This would represent a 4.3 percent year-on-year reduction in corn acres and a 2.5 percent increase in soy.
Chicago Board of Trade prices for both crops over the past couple of months have led many analysts to believe USDA's soybean acreage number is too low and that it could actually break 90 million. For the same reason, some are assuming that corn acres will fall below 90 million.
But rising new-crop futures for both corn and soybeans this month mean not only that growers could eventually receive better returns off of this year's harvest, but also ease some of the associated risk with planting either crop.
February is price discovery month for U.S. corn and soybeans under the revenue protection program of the USDA's Risk Management Agency. This month’s average price of December corn and November soybeans sets the insurance guarantee to U.S. farmers for the 2017 harvest.
Through Thursday, new-crop corn and soybean futures have pushed 1 percent higher since the start of the month, which means the eventual insurance guarantees are also slightly larger. Depending on if and how much prices rise in the next two weeks, this could increase the comfort level of farmers who may plan to stick with corn.
On paper, the economics still largely favor soybeans, and acreage could indeed push much above USDA’s projections. But corn’s rally this month could potentially add some complexity to the mix.
The new-crop November soybeans to December corn price ratio is a key indicator of which crop farmers may prefer to plant in the spring, and values at 2.5 or greater tend to favor soybeans.
The latest values for the 2017 contracts have been just below 2.6 – the highest in 20 years – and well above where 2016 stood one year ago.
Although there is still time for farmers to make their decisions and this price ratio is not the only determining factor, there is a reasonably good relationship between February values and the eventual acreage shifts from the previous year. And it may support the theory of even more soybeans and less corn.
Looking at the last 10 years of data, the current high value of November soybeans relative to December corn could accommodate a year-on-year corn acreage drop closer to 5 or 8 percent, similar to 2014 and 2008. The more aggressive scenario could result in corn plantings just below 87 million acres.
For soybeans, acreage could rise up to 8 percent on the year as in 2014, and this would bring total plantings close to 91 million acres.
But using this relationship to directly predict the likely trend in U.S. spring plantings is somewhat dangerous since there is no precedent for the current economic situation.
The only other year in the past two decades in which the soybeans-to-corn ratio compares with 2017 is 1997. In that year, corn acres actually rose slightly from the year before and soybeans were up 9 percent, but the domestic and international demand structure of both crops were so vastly different 20 years ago that using this year as a guideline may not be advisable.
However, the one comparison that can be made is that 1997 featured a large reduction in wheat acres from the year prior, and farmers largely made up for that with soybeans.
Wheat has particularly been losing acreage over the past couple of years, and the trend is expected to continue this year. Last year’s sharp downsizing of wheat area ultimately lent land to corn, but soybeans should be the primary recipient this year.
Can Corn Edge In?
It is true that the American farmer loves to plant corn, but the love affair is bound to go stale if corn continues to turn a disappointing profit.
The average price of new-crop corn in February has declined five straight years from 2011 to 2016, from $6.01 per bushel to $3.86. December 2017 corn is averaging slightly higher than last year so far this month, with averages of $3.97 through Thursday.
On Wednesday, December 2017 corn broke above the $4 level for the first time since late last June, closing at $4.02-1/4. Although the contract failed to maintain the 4-handle in Thursday’s session and fell to $3.99, the $4 mark has historically been a break-even point for U.S. farmers. Above that level, planting the crop becomes more favorable.
But with revenue seemingly shrinking each year, $4 December corn in February might not be enough to convince growers to favor the yellow grain this spring.
Earlier this month, USDA estimated that U.S. farm income would fall from last year’s levels by 8.7 percent based on weakening revenue from crop sales, rising cash expenses, and smaller government payments.
If USDA’s forecast proves true, 2017 will mark the fourth straight year of reductions to the overall income on American farms.
In the face of dwindling profit and without an unexpected shock to the current price structure, U.S. farmers may be forced to plant whichever crop on paper looks like it would earn them the biggest profit, despite their preferences or intuitions.
Of course this is evaluated on a case-by-case basis, as an individual farmer’s financial situation will dictate whether the acreage decision is guided by his heart or his wallet.
While the new-crop futures ratio clearly carves out soybeans as a better choice than corn this spring, a continued increase of new-crop corn futures into the spring could give corn-loving farmers a valid excuse not to switch to soybeans. This phenomenon would not be expected to cut significantly into soybean acres, but it is an additional piece to consider when solving this spring’s acreage puzzle.
And while everyone is obsessed with the economics right now, it is worth keeping in mind that spring weather can ultimately derail even the best-laid plans.
The USDA will revisit U.S. acreage expectations at the end of next week at its annual Agriculture Outlook Forum, but the first official figures for 2017 U.S. plantings will not arrive until the March 31 intentions report.