To begin, Table 1 shows the current and historical corn and soybean price guarantees, along with the price ratio. The first thing to note is that the corn price is 18% higher than last year and soybeans are 29% higher. By this measure, soybeans have outperformed corn relative to the previous year.
This is reflected in the soybean to corn price ratio, standing at a modern crop insurance high of 2.59. The closest comparisons to this outcome were 2017 and 2018. In both those years, the ratio reached 2.57, and the corn-soybean prospective plantings were split 50/50 between corn and soybeans.
One of the reasons that the price ratio is an imperfect guide is that there are a lot of economic relationships to consider in addition to output prices. One of the most important factors relates to the underlying cost structure associated with the two crops.
To examine this issue, we used Purdue’s crop budgets. Table 2 shows the historical revenue and contribution margin for average quality Indiana farmland. Contribution margin, or the difference between revenue and variable expenses, is helpful as it captures how much producers have to cover their fixed expenses (land, machinery, labor, etc.) and meet all their cash flow obligations.
To calculate these values, we used the crop insurance price guarantees, the budgeted yields, and the budgeted variable costs for each historical year. For example, in 2015, we used the 2015 budgeted crop yields, the 2015 crop prices, and the 2015 variable cost structures for each crop.
The final column of this table shows the difference between the corn and soybean contribution margins. You can see that in 2021, the budget shows a slight ($9) advantage to soybeans.
Consistent with the agronomic and market conditions in Indiana, the Purdue budgets often show an advantage to soybean production, so they should be interpreted with this in mind.
Rather than solely focusing on which crop has the advantage in 2021, we believe it’s more valuable to consider how 2021’s advantage measures up the historical observations. For example, 2020 was the only year since 2013 that showed corn to have an advantage. Consistent with the high soybean plantings in 2017 and 2018, these years showed large advantages for soybeans.
In other words, these data show the 2021 advantage for soybeans is actually smaller than it was in the previous years that generated equal corn and soybean acres.
Another key difference between years like 2017-18 and today is that the overall budget picture is much better today. The overall contribution margin in 2021 is $400 to $410 per acre, while in 2017 and 2018, the contribution margins ranged from a low of $246 per acre to a high of $300 per acre.
In short, the 2021 situation is quite a bit different in that it offers significantly more opportunity for profit potential and, perhaps more importantly, a lower likelihood of large losses.
The prospective plantings report will soon provide important information about how farmers plan to attack 2021. The initial crop insurance price guarantees for each crop are the highest since 2014.
Additionally, the soybean to corn price ratio is the highest since the development of the crop revenue insurance policies. In the past, ratios of this magnitude have resulted in corn and soybean acreage being nearly equal. In other words, soybeans will be very competitive for acres in 2021.
However, there are also things one should consider beyond the price ratio. When considering yields and variable expenses, soybeans’ advantage is less strong than in 2017 and 2018. Furthermore, overall contribution margins implied by these prices are also the highest that we have seen since 2013.
Of course, there are many other factors to consider. Among them are local yield and price basis differentials. Additionally, one must also wonder how high the total corn and soybean acreage will climb. All of these factors will work to shape the much-anticipated acreage decisions.
Finally, we must remember that there can be large differences between what farmers actually plant and the results of the planting intentions report. We – and the markets – will be watching closely.