Market Strategy: How Market Signals Alter Crop Mix

Market Strategy: How Market Signals Alter Crop Mix

There has been extra interest this year in corn-soybean planting intentions. If soybean acres come in a couple million above or below estimates, shifting production by about 90 million bushels, it probably doesn’t make a lot of difference in the price outlook given USDA’s 429 million bushel carryout this past month. The opposite might be true if we lose 2 million acres of corn, shifting 320 million bushels.  

A 2 million acre decrease in corn would reduce the 2015/16 carryover to 1.366 billion bushels from USDA’s Agricultural Outlook Forum estimate of 1.686 billion bushels, making prices very sensitive to any weather problem. Each 1-bu. drop in corn yield represents roughly an 80-million-bushel drop in production. Trendline yield is estimated at 165 bu., whereas the last eight-year average is about 152 bu. Imagine the price recovery a 152-bu. yield would accomplish. 

Elusive Intentions. As this went to press, USDA was completing its first survey-based planting intentions estimate.  A lot of speculation will have been laid to rest as to how many corn acres will be cut and transferred into soybeans. At its Outlook Forum, USDA suggested there might even be a reduction in soybean acres compared to 2014, not the increase many expect. Informa Economics’ initial estimate was 88 million acres, while an acreage of 86.5 million acres seems more reasonable. 

Though there will be periodic updates on “intentions,” we really won’t know the actual acreage until after producers have legally reported it on Form 578. USDA compiles that information in its October report and, finally, the following January. 

A lot of factors will go into my final decision to plant all soybeans, 80% soybeans or retreat to a 50-50 rotation. A $4 corn future price signal tells me the market either doesn’t want my acres or is so confident of a global surplus there isn’t a need for a weather premium. The $11.41 price flex insurance purchased nine months ago makes soybeans more viable and competes well with corn. If there is a rally in the offing for corn in 2016, that is when I will want corn on soybean ground that can produce 20 or 30 bushels more, especially in a challenging year.

Weather And Psychology. Should the heat dome engulfing California move east, I might harvest corn at considerably higher prices than currently offered. Twenty or 30 extra bushels per acre of corn on soybean ground, at $5 corn, is an advantage of $100 to $150 per acre I have to figure in when making a decision, plus my input costs are less, reducing my working capital. Based on the increasing year-to-year demand for protein, I think I’ll be able to garner a $1-per-bushel increase in price in soybeans after October 2015. I am not so sure about corn if we don’t cut acres sufficiently. 

There is also a psychological factor inside me that wants to say “no” to relentlessly high corn seed and fertilizer costs. Voting with my feet and pocketbook feels good sometimes, and it’s hard to put a price on that. 

It will be the low-cost producer who survives. Perhaps we can kick the can down the road another year with an acreage surprise or a weather problem, but at some point, uncomfortable decisions will have to be made. 

The market will do the dirty work of discovering a price representative of supply and demand. More than a year elapsed after the high costs of 1982 before the worst ag recession in my life arrived in 1985. We’ll likely make it through 2015/16 with new farm bill schemes giving us time to react and plan. It is 2016/17 that has me concerned.


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