The agricultural market always churns ahead of the March 31 USDA Prospective Plantings Report. So, it’s the best time of the year for the marketing gurus who flood the farmers with stories and a drought of facts. This year’s “simple” story says that farmers are cash poor and soybeans are cheaper to plant. Therefore, we will see more soybean acres, maybe 4–5 million, and about the same amount or fewer corn acres. On top of the cheaper to plant gem, the marketing gurus threw in the never-ending demand from China in this year’s “simple” story. As I have said before, China is the answer to every story in agriculture.
Let’s start with a couple of actual facts. First, soybeans are always cheaper to plant, and second, all demand growth comes to an end.
Using Purdue crop budgets for 2017, high yield corn and soybeans, in rotation, have variable costs of $436 and $241 per acre, respectively. So farmers could save $195 per acre by planting soybeans with most of the savings coming from fertilizer at $72 per acre and seed at $49 per acre. This cost savings also incurs a revenue penalty of $166 per acre using the same Purdue estimates. Of course, the savings side is a little clearer than the revenue penalty, but even so, a savings of $29 an acre is a small peg onto which to hang a big market move.
Corn and soybeans have taken acreage from every other crop since the introduction of the Renewable Fuel Standard program in the mid-2000s, with the two largest acreage losers being wheat and alfalfa. They were the only ones with sufficient acreage to give up enough acreage to make a difference. With the exception of 2007’s extraordinary chase of corn for ethanol, the market doesn’t give farmers much incentive to break their rotations. Since the late 1990s, the corn-to-soybean acreage ratio has stayed slightly above 1. This follows from the fact that farmers want to maximize their income, and the best practice for farmers is to avoid outguessing the demand at the risk of the farming practices.
The results from the University of Minnesota FINBIN since 1994 show a couple of interesting facts. And, farmers know this by intuition more than analysis. The long-term price ratio of 2.5 times soybeans to corn per bushel makes the growing of the two crops a push for profits per acre. They have a different cost structure, but they share the same demand market. The net returns for corn versus soybeans are within $2 per acre over this time period, however, the average has a wide variation. Corn or soybeans win for a couple of years before the reversal comes along making the other the winner.
Corn was a clear winner from 2010 through 2012 reflecting the demand shock of ethanol, but soybeans took back almost the entire advantage from 2013 to 2015. The 2016 numbers will come out sometime in early April. My guess, ahead of time, is that the gap narrowed considerably given the yields and prices. If a farmer could see the future, they would chase the hot crop from year to year, but most farmers recognize they’re just guessing. Most have too much risk aversion to swing for the fences with big bets on crop rotation. Field operations are tough enough without adding big acreage swings from year to year.
Even if soybean acres increase in 2017, that will come from stealing marginal acres from wheat and alfalfa. Wheat’s historically low price ratio compared to corn and soybeans is the market’s attempt to convince farmers to plant less wheat acres. The problem for many farmers is that the yield penalty in their regions can be prohibitive for switching to soybeans, and soybeans aren’t any cheaper to plant than wheat if trying to conserve working capital. The reason that soybeans might pick acreage from alfalfa and hay is the Risk Management Agency’s (RMA’s) new ruling on forage crops. The RMA will consider alfalfa or hay that has been planted for more than three years to be a permanent pasture. So, if farmers break out alfalfa or hay in the fourth year, or later, those acres will be considered “new breaking”, and farmers will be penalized on their insurable coverage for a year. I won’t go through the gory details, but there are farmers who might plant alfalfa and hay to something else to avoid this penalty.
Lastly, there will be an end in the growth of soybean export to China. Even the Chinese don’t import soybeans just for the sake of importing soybeans. As the following chart shows, the saturation point is much closer than before. Both Chinese soybean utilization and meat production on a per-capita basis have moved into the upper ranges for the global market. Using USDA estimates, 2016 supply reached 82 kilograms per capita. It’s difficult to estimate the saturation point when comparing countries due to the blend of meat production and consumption. You can’t compare U.S. soybean usage to China for a saturation point. China will never be an exporter of meat and biofuels like the U.S. Additionally, China’s population growth has slowed to 0.4% annually. So, once they achieve their saturation level on a per-person basis, the market will need to find a new story to tell.