Extension Communications
3614 Administrative Services Building
Ames, Iowa 50011-3614
(515) 294-9915
2/5/01
Contacts:
Robert Wisner, Extension Economics, (515) 294-6310,
rwwisner@iastate.edu
Elaine Edwards, Continuing Education and Communication
Services, (515) 294-5168, eedwards@iastate.edu
Three Dollar Corn and Three Dollar Soybeans?
By Robert Wisner
Extension Economist
Iowa State University Extension
AMES, Iowa -- A widely listened to Iowa radio station recently quoted one market analyst as forecasting $3 corn and $3 soybeans next fall. This forecast is making coffee shop discussions about possible corn-to-soybean acreage shifts more lively. Are these prices possible? The answer is yes, despite a long history of the western Corn Belt soybean/corn price ratio being in a $2.30 to $2.45 range. Are these prices likely to occur next year? That's a very different question. What conditions would be required for that to happen? Can we quantify the changes in production needed in the year 2000 for $3 corn and soybeans to occur? Here are some perspectives and partial answers to these questions.
What would be needed to make this happen?
To bring such a dramatic change in the corn/soybean price ratio, the grain/oilseed markets would likely need some combination of (1) sharply reduced U.S. corn acreage and modestly increased U.S. soybean acreage, (2) an unusually dry June and July this year but good August and early September rains, (3) a sharp increase in U.S. corn exports stemming from either a second year of major Chinese crop problems, resolution of Starlink problems, and/or possible Chinese decisions to curtail corn exports despite a likely recovery from last year's weather and insect problems.
To get a perspective on how much acreage switching between corn and soybeans would be needed, let's start with the projected corn balance sheets for 2001-02. Tables 1 and 2 below show our mid-January projections for the year ahead, with sharply below normal, normal, and slightly above normal yields (Columns A, B, and C, respectively). Note that column A of Table 1 shows U.S. marketing year average corn prices just under $3/bushel and harvest futures moderately above $3. Note that column C of Table 2 shows Iowa harvest-time soybean prices in the low $4 per bushel area. Column B, the normal weather or most likely column is a starting point for the analysis.
Table 1. Corn Balance Sheet Projections for 2001-02
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Below Normal |
Normal |
Above Normal |
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Harvest acres (millions) |
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Bushels per acre |
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Total (million bushels) |
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Iowa Average Price/bu. |
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Harvest Price, central Iowa |
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December futures at harvest |
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Table 2. Soybean Balance Sheet Projections for 2001-02
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Below Normal |
Normal |
Above Normal |
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Harvest acres (millions) |
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Bushels per acre |
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Total (million bushels) |
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Iowa Average Price/bu. |
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Harvest Price, north central Iowa |
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November futures at harvest |
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Note that column A shows approximately 2 billion bushels less corn production than column B---due to widespread adverse weather. Suppose farmers across much of the Midwest shift land from corn to soybeans, creating a similar decline in production even if weather is approximately normal. Most likely they would shift lower quality land to soybeans and leave the best for corn. Let's use an average yield on the shifted corn acres nationally of 125 bushels per acre, about 13 bushels below a normal national average yield. Where nematodes are not a problem, continuous corn would be the first to shift to soybeans. It is well known that such corn has a yield disadvantage of 10 to 12 percent versus corn rotated with soybeans. Two billion bushels divided by 125 bushels per acre indicates farmers would need to take about 16 million acres out of corn production, assuming other market factors remain unchanged from column B of Table 1--to boost prices to about $3 without help from the weather. That would be about a 22 percent decline from last year in U.S. corn plantings, ignoring the tendency of shifting lower-yielding land out of corn to modestly boost the average yield on the acres remaining in production. Suppose our most likely 2001-02 corn exports are too low by half a billion bushels or 25 percent. In that case, with normal weather, a shift of about 12 million acres of corn or a plantings reduction from last year of about 17 percent would be needed.
Next, looking at soybeans, a shift of 22 million acres into soybeans with a U.S. average yield on those acres of 35 bushels per acre would produce about 770 million bushels more soybeans than in column B. An increase of 17 million acres in soybean plantings from last year would boost production by about 600 million bushels. Adding that to the 2001-02 carry-in stocks would generate total supplies of 3.80 to 4.00 billion bushels, up 20 to 25 percent from last year. Using our usual price forecasting rule that a one percent change in U.S. soybean supplies brings a 2.5 percent change in the season average price (provided all other market factors are unchanged), that would push the expected Iowa season average price down to about $1.75 to $2.30 per bushel. And that doesn't count a likely shift of acreage from winter wheat to soybeans in some areas. At these prices, the soybean LDP likely would be around $3 to $3.50 per bushel, and would likely trigger significant changes in farm policy.
Are such dramatic shifts in plantings likely? Probably not, although a modest shift from corn to soybeans appears likely. Our balance sheet shows a 0.7 million acre shift from corn to soybeans plus a 0.5 million acre shift from other crops into soybeans. Actual plantings will be influenced by fertilizer prices and availability this spring. In irrigated corn areas of the Southwest, high costs of natural gas for irrigation may cause some shift from corn to grain sorghum and soybeans. However, acreage impacted in that region is relatively small compared with the amount of corn planted in the Midwest.
Nitrogen and natural gas market developments
Nitrogen fertilizer costs will be a significant influence on the final 2001 corn/soybean acreage pattern. These markets can be very emotional in times of strong demand or tight supplies. That has been the case this winter with both natural gas and nitrogen fertilizer, two closely related markets. Natural gas is the basic feedstock for producing nitrogen fertilizer. It is not unusual for markets to overreact on the upside under such conditions. February natural gas futures on the New York market as of Feb. 1, had fallen 36 percent from the early January high. Prices on the April natural gas futures contact at the peak in January were about 30 percent lower than corresponding prices on the February contract. Even so, April futures prices have declined by 24 percent since the peak. Natural gas prices on the April contract at this writing are about 18 to 20 percent higher than in late October. February futures prices were about 22 to 24 percent higher than last September and October. These prices are strongly influenced by the weather, as well as by user conservation. Trade sources at this writing indicate gas stocks have shown a smaller-than-normal seasonal decline in recent weeks, suggesting that high prices have produced significant energy conservation efforts.
In the week ended Feb. 1, gulf prices for anhydrous ammonia were reported to have declined $5 to $15 per ton from the previous week, along with earlier declines. Nitrogen facilities at Donaldsonville and Avondale, La were reportedly being brought back into operation, along with another facility in Oklahoma, and imports also were generating some price pressure. Extreme cold for the month of December and for shorter periods in January were major contributors to strong demand for natural gas for home and industrial heating.
Along with input costs, agronomic considerations also will be important in determining the corn/soybean acreage mix for this year. A considerable amount of continuous corn exists in northern Iowa and southern Minnesota, because of soybean cyst nematodes. While without this problem, the soybean loan rate tends to favor soybean plantings over corn, reducing the expected soybean yield by 4 to 6 bushels per acre or more significantly lowers soybean returns and shifts economics in favor of corn. Also, most farmers are likely to be reluctant to shift to continuous soyeans or to multiple years of soybeans on the same land. Multiple-year plantings of soybeans can create extra disease and pest problems in following year.
ml: isufarm
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