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Kub's Den
Wednesday, March 4, 2015 9:28AM CST

By Elaine Kub
DTN Contributing Analyst

"Will there be a battle for acres this year?" asked a woman in the front row at the conference.

"No," I replied, dismissively.

Quickly, someone in the back of the room spoke up to correct me. "Well, there's always a battle for acres. Every year."

And of course I had to backpedal. This is true. Every spring farmers must decide which species of seed they want to plant into their ground, and among the many variables in their decision is the expected final price for that crop. So, yes, every year the markets' new-crop prices can theoretically influence how much acreage gets planted. But I think what the first woman was trying to ask was: Will there be a wild, volatile push by one crop's market or the other's to noticeably change farmers' minds? That's what I think of when I think of the phrase "battle for acres" -- big movements or notable trends during the early months of a year.

And that is actually surprisingly rare.

During the month of February, the daily closing prices for new-crop futures contracts are averaged together to make a reference price used in crop insurance policies. In 2015, those prices are $4.15 for corn (down from $4.62 last year), $9.73 for soybeans (down from $11.36 last year), and $5.85 for spring wheat (down from $6.51 last year). Correspondingly, the government is guessing that planted acreage for these crops will also be down from last year.

Now during the month of March, the market can make a final "bid" to try and change farmers' minds before the seed gets purchased or before it goes in the ground. Of course, March isn't necessarily the final timeframe for such decisions; some fields will still be unplanted in early June. And these March prices don't have an insurance policy attached to them to give them any ultimate tie-in to the prices received at harvest. But between now and the March 31 release of the USDA's Prospective Plantings survey, the markets have a chance to shine by outperforming each other and attracting more planting intentions.

However, in reality, once a springtime price ratio is established, the markets tend to maintain that relationship. All that is known or believed about the relative scarcity and demand for crops in the next marketing year isn't exactly set in stone, but it's not very likely to change, either. The South American crops are pretty well made; the domestic demand trends are pretty well understood.

I looked at the past 10 years of new-crop soybean and corn market behavior during the month of March and found relatively few examples when the "battle for acres" got exciting in that timeframe. For your reference, the 10-year average for the soybean-to-corn price ratio is now 2.48-to-1. After this February's new-crop prices were averaged, it looks like the soybean market is only offering farmers a slightly underpriced 2.35-to-1 ratio, although that may be enough to win some acres away from corn if a farmer is attracted by soybeans' lower input costs or is more confident of their yield.

I calculated similar ratios for the February new-crop price averages from each of the past 10 years (see the past five below), and then compared those numbers to the soybean-to-corn price ratio a month later, right before the annual Prospective Plantings report was released.

Of course it depends on what was going on in the world at the time -- which crop was scarce, did it look like planting would be delayed by weather, etc. -- but generally through the month of March, the ratio stayed pretty close to where it ended in February. If it changed, it tended to revert closer to the expected average ratio. Five times in the past 10 years, the ratio moved closer to normal by the end of March. The most notable example was 2012:

2010 Feb ave: 2.32-to-1 3/30/2010: 2.41-to-1
2011 Feb ave: 2.24-to-1 3/30/2011: 2.29-to-1
2012 Feb ave: 2.21-to-1 3/29/2012: 2.49-to-1
2013 Feb ave: 2.28-to-1 3/27/2013: 2.24-to-1
2014 Feb ave: 2.46-to-1 3/28/2014: 2.44-to-1
2015 Feb ave: 2.35-to-1 3/30/2015: ?

So the most likely outcome for 3/30/15 is to move closer to normal. That is to say, for soybeans to gain relatively more or lose relatively less in price than corn. Soybeans don't typically go from underpriced in February to overpriced by the end of March, so let's say the upper limit will be 2.48-to-1. That could look like $10.29 for November soybean futures, if December corn futures stay still at $4.15. Or it could look like $3.95 for December corn futures if November soybean futures stay still at $9.81.

Three times in the past 10 years, soybeans have gone from underpriced in February to more underpriced by end of March. For instance, in 2009 the ratio itself dropped 7% by the end of March. So, let's say the lower limit will be 2.18-to-1, which could manifest itself as $9.04 November soybeans if December corn stays at $4.15. Or it could look like $4.50 December corn, with November soybeans still at $9.81.

Yes, there will be some sort of competition between the corn market, the soybean market, the wheat market, the sunflower market, the canola market, the alfalfa market, and the markets for any other crop that can be planted into the ground this spring. But whether that competition can be characterized as a "battle" or not -- maybe more of a skirmish? -- will play out day by day.


Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(CZ/AG)


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