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11-10-2011 10:07 AM - edited 11-11-2011 07:17 AM
So, I started out asking this respected CME Group floor trader his thoughts on the current historically low corn/soybean price ratio. He graciously offered up his take on the corn/soybean price ratio and other market-influencing topics. Grab a cup of coffee and see what you think. There's plenty here to chew on.
In his own words: "The corn/soybean ratio’s historical perspective is misleading. A 10-year average, for instance, includes a lot of low price years when prices were trading close to loan rates and cost of production. Today, we have fuel markets that are out-bidding traditional uses.
For corn, 70% of a bushel of corn goes into fuel production, leaving only 17-lbs of by-product DDG. But, that by-product competes directly with soy meal. With soybeans, only 11.5 lbs out of 60 are soy oil, which goes into the fuel bid, leaving 80% of its by-product (soymeal) to compete in traditional feed demand market. High priced corn is also ration for the traditional feed demand markets as well. So, you see we have broken down the traditional relationship and we should ignore the historical lows in the corn/bean ratio.
Also, in regards to the rest of the world, remember soil types in Brazil do not favor corn production. Traveling throughout Brazil, I noticed there was no drainage, it isn’t necessary. They don’t have a clay-base and water percolates down through 30 feet of top-soil, if you can call it that. Nitrogen fertilizer tends to leach with nearly twice as much rainfall and soil types that have less organic matter.
Also, if you are in the Center West region, you are a long way from port, and a long way from population centers where feed use is heaviest. So, you have a long way to haul corn that is three times the volume per acre as beans. So, the US has a comparative advantage in growing corn and Brazil has more incentive to grow beans. This is the way the market is reorganizing itself in the era of bio-fuel.
Also, consider China. It could grow more beans, but instead they have promoted corn production and allowed more bean imports. I assume they do this for the same reason; cost by volume is much higher to transport corn and corn is a higher value added product.
We are losing market share in soybeans, as SA production grows in beans and Palm oil production increases. So, we can grow more corn acres here to meet increasing fuel demand and lose our bean export market to South America, who can expand into new lands. The soybean/corn ratio can short-cover in dramatic fashion, if Southern Hemisphere crops hit bad weather. But, without that threat, the trend should be more bean acres there and less here. With corn adding another 3 to 5 million acres over the next couple of years to meet 15 billion gallon mandate in a routine manner, I am not picking a bottom in bean/corn ratio until or unless I see fuel prices dropping in a dramatic way or weather turning sour in SA.
You will see some switch to more corn acres in Parana and Rio- Grande. These are areas that traditionally have grown more corn and they are close to animal production and export ports in the south. So, more corn and more beans in Brazil, perhaps less cotton and over the last couple of years even less sugar. The last I saw it looked like corn up 2 million acres and beans up 1 to 2 million acres, mostly in the North. And, less bean acres in the South."
11-10-2011 11:19 AM
Interesting. I think we need new paradigms in marketing. Ideas that worked five years ago don't work today. Farmers don't have the time or expertise to study markets in depth, so most of us like to find a few key items we can use as reference points. Seasonal prices is one, the corn-bean ration is another, carry is in there and of course reports. But, international finances, energy and more are big players as is politics. At this point, I have no clue what the big bellwethers are. So, sadly, I've been marketing more short term cash and fewer hedges and contracts. That is not a solution I think will win in the end.
11-10-2011 02:23 PM
I love that information and its spot on. where can I get that in a story or blog etc. Or was that just a statement he made to you? I checked the story in your link and it doesnt have that specific info in it.
11-11-2011 07:15 AM
No, this was not part of a story. This is exclusive information I gathered for you and everyone else on this site from the floor of the CME Group Exchange.
I hope you found it to be informative and useful.