Acreage Mix Steady in Rough Waters
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The price of corn and soybeans has been swinging on trade threats and changing acreage mixes in the United States. However, those price movements have yet to change the relative profitability between corn and soybeans writes Gary Schnitkey on the farmdocDaily website this week.
Soybeans remain more profitable than corn in the University of Illinois agricultural economist’s crop budgets, but the difference between them has narrowed. Schnitkey says the risks of significant price declines have increased, particularly for soybeans and that hedging a large percentage of 2018 expected soybean production seems prudent.
Current prices are higher than earlier in the winter. The central Illinois fall delivery bids on April 6, 2018 were $3.80 for corn and $10.00 per bushel for soybeans. Budgets based on these fall delivery bids are shown in Table 1.
Panel A shows budget for high productivity farmland in central Illinois. The operator and land return for corn is $256 per acre for corn-after-soybeans and $295 per acre for soybeans-after-corn, indicating that soybeans are projected to be $39 per acre more profitable than corn. Corn-after-soybeans is projected to be roughly the same profitability as soybean-after-soybeans ($256 per acre for corn-after-soybeans and $260 per acre for soybeans-after-soybeans).
In lower productive areas, soybeans dominate corn. In southern Illinois, corn-after-soybeans has an $84 per acre return at a $3.80 price compared to $141 per acre for soybeans-after-corn at a $10.00 per bushel price (see Panel B of Table 1). Soybeans-after-soybeans has a $101 per acre return, higher than the $84 per acre returns for corn-after-soybeans. These returns comparisons suggest having more soybeans than corn in southern Illinois. In recent years, southern Illinois farmers have been planting more soybean than corn. Recent price moves increased the profitability of corn relative to soybeans, but not enough for a budget to suggest switching to more corn.
Price changes have increased corn profitability relative to soybean profitability, but have not suggested shifts in acres.
Higher risks suggest a prudent risk management strategy is to forward price more of the 2018 expected soybean production. However, pricing more production introduces the possibility of hedging losses if prices increase. If farmers have purchased an insurance product with a guarantee increase such as Revenue Protection (RP), offsetting payments will be received in cases when prices rise and yields are below guarantee levels.
Farmers who purchased revenue crop insurance policies will have downside price production. Given the $10.21 projected price and yields at guaranteed levels, the harvest price must fall below the following levels for different coverage levels to trigger payments on revenue policies (e.g., Revenue Protection (RP) and RP with harvest price exclusion):
- $8.67 at an 85% coverage level ($10.21 x .85)
- $8.17 at an 80% coverage level ($10.21 x .80)
- $7.65 at a 75% coverage level ($10.21 x .75)
While these revenue products will offer downside risk protection, most farmers will face loss situations if prices fall enough to trigger insurance payments.
Low prices could also result in commodity title payments under Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC). ARC is a revenue program that makes payments based on county yields and market year average prices. Given yields near guarantee levels, ARC at the county level would begin to make payments around $8.70 per bushel for the 2018 production year. PLC has a reference price of $8.40. As a result, PLC will not make payments until MYA prices fall below $8.40 per bushel. The 2018 payments under ARC and PLC would both be made in the fall of 2019, a considerable distance into the future.
It is important to remember that ARC and PLC are based on base acres and not planted acres. As a result, planting decisions in 2018 will not impact ARC and PLC payments. Therefore, the size of ARC/PLC payments should not influence planting decisions.
Both crop insurance and ARC/PLC offer downside price protection if prices fall dramatically as the result of some event such as enactment of soybean tariff writes Gary Schnitkey. Still, he says, hedging a high percentage of production seems prudent, particularly given that a late planting season appears more likely now. The current cold and wet conditions could lead to later planting, and perhaps shifts to soybean acres. This switch could lead to further downward price pressures.