Given all of the other news that is floating around, it isn’t surprising that we haven’t heard a lot of discussion around the 2020 crop insurance guarantees. We usually look to these guarantees to get an indication of whether the prices provide a nudge toward either corn or soybeans.
Guarantees Lower Yet Again
The initial price guarantee level was $3.88 for corn and $9.17 for soybeans. Both of these prices are the lowest seen for some time. Since 2007, the crop insurance guarantee for corn has only been lower in 2016 when it clocked in at $3.86. For soybeans, the price was also lower in 2016, 2009, and 2007. Bottom line, the guarantee prices are toward the bottom of what we have seen in the last 14 years.
When evaluating the attractiveness of these crops, we like to calculate the the revenue guarantees and compare them to the costs of production. We have used an 80% revenue guarantee and the Purdue crop budgets for high productivity cropland as the basis for this comparison.
In table 1 we show the situation for corn since 2007. In 2020 (the last row of the table) you can see that the revenue guarantee is $655 per acre (211 bushels per acre yield). Purdue’s estimate of the variable costs is $435 per acre. This means that under an 80% revenue policy, the crop insurance guarantee exceeds variable costs by $220 per acre. This is actually a bit higher than last year because variable costs are forecast at $35 per acre less than in 2019. The net guarantee is $37 dollars short of covering the cost of land rent. This is not unusual. The last time the net guarantee was sufficient to cover land costs was 2014.
Table 2 shows the same calculations for soybeans. The revenue guarantee for soybeans is considerably less than for corn, but it is important to understand that the variable costs are also significantly lower. The end result is that the net guarantee is slightly larger for soybeans than for corn.
No Clear Advantage
The difference between the last two columns of tables 1 and 2 are shown in Figure 1. In this case, bars above $0 indicate a net guarantee advantage for soybeans and those below $0 favor corn. As you can see, soybeans have held an advantage every year since 2014. However, it is also worth pointing out that at $7 per acre, this is the smallest advantage for soybeans in the last 7 years. In other words, based on the guarantees alone, soybeans are as unattractive as they have been in the last 7 years.
Figure 1. Soybean Net Guarantee Advantage Over Corn, Indiana 2007-2020.
Wrapping it Up
It may be surprising, but the budgets here showed a very slight advantage to soybeans over corn. There are a couple of things to keep in mind though. First, this is the smallest net guarantee advantage seen since 2013. From 2007 to 2013, U.S. acres were heavily weighted toward corn acres. It is also important to understand that there are a lot of regional differences in the relative attractiveness of soybeans versus corn. In our experience, Indiana tends to be a state where soybeans are more favored economically over some other regions. In other words, just because soybeans show a slight advantage in Indiana, don’t expect that the same advantage shows up in all regions. Second, the advantage is rather small, meaning that the signal isn’t really strong either way.
Last year saw a large decline in soybean acreage relative to corn. However, it is important to remember that much of that shift was likely caused by the planting conditions of 2019. What would have happened absent those conditions is impossible to know. The thing we have to take away from the analysis here is that corn is at least as attractive to growers in the region encompassing Indiana as it has been for some time.
There will likely be many changes that take place in the markets heading into planting. The uncertainty at this point in time is as great as any that we can remember. Many factors will likely come into play. One that we didn’t discuss extensively is that the variable costs of planting and producing soybeans are much lower than corn. How all of this plays out will be determined in the near future.
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