The magnitude of the recent rally in corn prices has been greater than the rally in soybean prices. This has taken the soybean:corn price ratio to just 1.76 — the lowest soybean:corn price ratio since 1996. What has caused this and is it likely to stay? I'm going to review the history of the index and then look at some of the short-term market factors.
A historical review of the soybean-corn ratio shows these extremes. The highest ratio in the last 34 years came in 1973 when the soybean:corn ratio hit 3.9:1. This was the year that the world was close to running out of soybeans. The ratio was at the lowest level in the last 34 years in 1996 when the ratio fell to just 1.54. The main reason for this ratio high in 1996 was that corn prices exploded to $5.54/bu. The swing in the soybean:corn price ratio over the last 34 years shows that price works. The result is that usually within 12-18 months, the ratio swings back to normal and sometimes the swing is to the other extreme. How far the ratio swings is a function of planted acreage, weather and global demand.
Our short-term analysis shows this price action. From the August 2006 low, the weekly corn continuation chart shows a rally of $1.75 to the late December 2006 high. This is an 80% rally. In the soybean market, from the mid-September 2006 low, the weekly soybean continuation chart shows a rally of $1.66/bu. That is just a 31% rally. This corn vs. soybean rally created a soybean:corn price ratio of just 1.76:1, which is the lowest ratio since 1996.
There are five new factors that are impacting the current soybean:corn price ratio:
The need for more corn acres in the U.S. as the ethanol industry continues to grow. This has created a very inelastic and strong domestic demand for corn.
The consistently higher per-acre profits in corn vs. soybeans in the U.S. the last three years.
Higher Crop Revenue Coverage (CRC) and Revenue Assurance (RA) that guarantees more revenue from corn than soybeans for the 2007 corn and soybean crops.
U.S. farmers have seen a larger increase in corn yields vs. soybean yields in the last three to five years.
The large increase in soybean production and exports out of South America is creating a Corn Belt in the U.S. and a Soybean Belt in South America.
Will this current soybean:corn price ratio continue? I don't think so. If you look at the history of this ratio, odds suggest a return to a normal 2.5:1 ratio within 12 months. With the current demand for corn and increasing production out of South America, odds are against a return to 3:1 any time in the near future.
What to do?
With the volatile price action in corn and soybeans these are my current recommendations. For corn I suggest that 2006 cash corn sales be at least at 60% with new-crop 2007 sales at 10-20%. For soybeans I suggest that 2006 soybean sales be at 40-60% with 2007 sales at 10-30%. Holding off on these sales has been risky but profitable. Now it's time to lock some of these gains in. Get ready to use any rally over the next two to six weeks to increase old-crop and new-crop corn and soybean sales. The hard down move in early January is a preview of what may happen later this spring and summer if normal weather and trend line or higher yields develop.
Alan Kluis is the president of Northland Commodities LLC, based in the Minneapolis Grain Exchange, Minneapolis, MN. You can contact him at [email protected] or call toll free 888-345-2855.