What's it going to take to get Midwest farmers to shift more acres to corn next year?
Even though harvest is just beginning, that question is on the minds of lots of folks in the ethanol, processing and livestock business. Ethanol is set for a major expansion, and it will need corn - lots of it - to make that expansion happen. Futures prices for corn reflect that expected demand.
Yet, corn-after-corn can be a tricky proposition, both agronomically and economically. Messing with a crop rotation is serious business.
Overall, grain prices look really positive over the next two years. Corn prices are projected to be 45 cents per bu. higher in 2007 than in 2006 ($2.88 - $2.43) and 16 cents per bu. higher in 2008 than in 2007. Similarly, soybean prices are projected 61 cents per bu. higher in 2007 than in 2006 and 37 cents higher in 2008 than in 2007.
The issue has been analyzed and summarized in a new article by University of Illinois' farm management specialist Gary Schnitkey. He says projected corn and soybean prices for 2007 and 2008, based on futures contracts, result in soybean-corn price ratios below historical averages and below the price ratio implied by loan rates. "As a result, corn production may be more profitable than soybean production over much of the corn-belt," he concludes.
The historical average soybean-corn price ratio is 2.31, meaning that soybean prices have averaged 2.31 times corn prices. Futures prices result in projected prices ratios of 2.10 in 2007 and 2.11 in 2008, significantly below the historical average. The lower that number, the more attractive corn is if you consider price alone.
But as Schnitkey points out, there's more to this decision than price alone. He also factors in yield and costs to come up with a breakeven soybean-to-corn price ratio for the 11 major corn and soybean producing states. In this equation, the cost difference is the additional cost of producing corn-on-corn instead of corn following soybeans. The cost difference was set at $110 per acre.
If soybean and corn prices result in a ratio less than the breakeven ratio, corn production is forecast to be more profitable than soybean production. If the price ratio is above the breakeven ratio, soybean production is more profitable than corn.
Take, for example a breakeven ratio of 2.4, a forecast corn price of $2.80 per bu. and a forecast soybean price of $6.00 per bu. The forecast prices result in a ratio of 2.14 ($6.00 soybean price / $2.80 corn price). That scenario favors corn because the forecast price ratio of 2.14 is below the 2.4 breakeven ratio.
Read the article at Farmdoc, the University's farm management decision-making website. Schnitkey has done a county by county analysis of Corn Belt regions where it might make more sense to push corn acres higher.
Switching more acres to corn may make sense next year, but a lot of factors come into play. This analysis may help you make your decision.