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Soybean-Corn Price Ratio Is it Still Relevant? August 15, 2011

Soybean-Corn Price Ratio Is it Still Relevant? August 15, 2011. Greg Halich 859-257-8841 Greg.Halich@uky.edu. 311 CE Barnhart Dept . Agricultural Economics University of Kentucky Lexington, KY 40546. Why is the Ratio Important? Farmers : Help w/planting decisions. Traders :

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Soybean-Corn Price Ratio Is it Still Relevant? August 15, 2011

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  1. Soybean-Corn Price Ratio Is it Still Relevant?August 15, 2011 Greg Halich 859-257-8841 Greg.Halich@uky.edu 311 CE Barnhart Dept. Agricultural Economics University of Kentucky Lexington, KY 40546

  2. Why is the Ratio Important? Farmers: • Help w/planting decisions. Traders: • Indicator prices out of balance. → New CME option.

  3. Typical Ratio (pre-2005)? • Neutral. • Favors Corn Production. • Favors Soybean Production. Fundamental Question: Is this still valid?

  4. Thesis: • 2.40 ratio has different meaning today vs. 1998. • 2.40 ratio may have different meaning in 2012 vs. 2013.

  5. Ratio and Planting Decisions: • Need 10-15 million acres more corn then to soybeans. → Need continuous corn acres. → Better productivity ground. • Evaluate continuous corn vs. rotational soybeans.

  6. Three Soil Productivity Levels

  7. August 2011: What CME contract(s) relevant at this point?

  8. August 2011 → New Crop 2012 • February 2011 → New Crop 2011 Once crop is planted need to move to following year.

  9. Planting Implications 2012: • Would probably get a flood of corn acres at the expense of soybeans. • Current price ratio = 2.07 • My prediction is that ratio will increase 2.25-2.30 range.

  10. Historical Price Ratio: • 2.30-2.50 Range. • Lower ratio favors corn. • Higher ratio favors soybeans.

  11. New Era Price Ratio “Neutral” Ratio Will Change: • Relative commodity prices. • Relative input costs.

  12. Estimate “Neutral” Ratio 2012 • Constant corn price. • Soybean price changes → Profit cont. corn = rotation.

  13. Results 2012: • Current Price Ratio 2.07 • Projected Soybean Price $14.60 • Projected “Neutral” Ratio 2.35

  14. Results 1998: • Corn Price $2.25 • Projected Soybean Price $5.41 • Proj. “Neutral” Ratio 2.41

  15. Back to 2012: • Current Corn Price $6.20 • Projected “Neutral” Ratio 2.35 What happens if commodity prices fall?

  16. Results 2012 Lower Comm Prices: • Corn Price $5.20 • Projected Soybean Price $11.54 • Orig. “Neutral” Ratio 2.35 • Proj. “Neutral” Ratio 2.22

  17. Results 2012 Higher Comm Prices: • Corn Price $7.20 • Projected Soybean Price $17.66 • Orig. “Neutral” Ratio 2.35 • Proj. “Neutral” Ratio 2.45

  18. Back to 2012 Base Scenario: • Current Corn Price $6.20 • Projected “Neutral” Ratio 2.35 What happens if input price increase? N increases $.50/unit to $.70/unit

  19. Results 2012 Inc. N Prices: N increases $.50/unit to $.70/unit • Corn Price $6.20 • Projected Soybean Price $13.75 • Orig. “Neutral” Ratio 2.35 • Proj. “Neutral” Ratio 2.22 N increase ≈ $35/acre

  20. Take-Home Messages Price Ratio Still Relevant, But: • General Rule-of-Thumbs obsolete. → E.g. 2.30-2.50 • “Neutral” price ratio can change each year. → Need to evaluate each year.

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