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Corn+Soybean Digest

Corn/Soybean Spread to Narrow


As 2012 came to an end and we move forward into 2013, soybean prices have rarely traded at a price ratio this low relative to corn. And when they did, it did not last long. This all but guarantees another year of huge volatility in the corn and soybean market. Bulls can conclude that this means soybeans are going a lot higher. Bears will conclude that this means corn is going a lot lower. The majority may conclude it will be some of both.

While weather will certainly be the hot topic in all the coffee shops, let’s remember that we have never lost a corn crop due to a January drought. Drought forecasts during the winter have historically resulted in price rallies for selling. I think this will be the same this year.

Here are some reasons why the soybean/corn spread is going to narrow appreciably in the next nine months and why the majority of that move is going to come from a bear market in corn – not a bull market in soybeans. The reasons are:

  1. Feed usage of corn this year is going to be down 400 million bushels.
  2. Ethanol usage is also down 400 million bushels.
  3. Exports of corn are also down 400 million bushels.
  4. Corn acreage is going to be up and soybean acreage will be down.

High prices, in this case corn, result in users cutting back and growers growing more. We have lost essentially 20% of the world’s corn export market in the last two years. Livestock numbers are not increasing, and feeders are finding less expensive substitutes for corn. The export market may take years to get back.

I would anticipate that corn for ethanol use will start coming back by mid-summer. But it will be too late to get total corn usage for ethanol plants back anywhere near where we were a year ago. Roughly 20 ethanol plants are currently shut down. Ethanol supplies, however, are getting near pipeline level lows and with the mandates still in place, prices of ethanol will start rising relative to gasoline, which will then improve the profits of ethanol plants, and some of these 20 idle plants will come back online.


Corn acreage is up

For those who prefer to concentrate only on drought conditions, keep in mind that U.S. farmers will plant a lot more corn this year than last year. Our estimate is 98 million acres will go in the ground versus this past year’s 96.9. More acres are being planted worldwide as well. With the drop in demand, weather would have to be much worse in 2013 than in 2012. Carryover supplies of corn are going to go up under almost any condition. It is thus hard to argue a bull case for corn.

There will undoubtedly be weather rallies in both corn and soybeans over the coming months. The question is “from where?”

The old wise sayings “never store a short crop, always store a big crop” and “short crops peak early and have a long tail” seem extremely appropriate this year. 

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