Introduction
Domestic and global supplies of corn and soybeans are tight. Domestic ending stocks are at their second lowest level since 2012/13 for corn and lowest level since 2015/16 for soybeans. The global stocks-to-use ratio for the two crops also is down, largely due to multiple years of droughts in South America, the war in eastern Europe disrupting the Ukrainian corn crop, and dry growing conditions in much of the U.S. Corn Belt in 2022. This means competition for corn and soybean acres in 2023.
Many factors will shape planting decisions, including record-high fertilizer prices. Seasonal prices for anhydrous ammonia have trended up since August. At $1,415 per ton, anhydrous ammonia costs 6.3% more compared to the same period last year, a seasonal record high at the time. Although national average prices for MAP and potash have decreased slightly since August, they also are at seasonal highs; MAP is $978 and potash $848 per ton.
This report examines current market signals for profitability in corn and soybean markets and breakeven levels for the two commodities at different fertilizer prices. We have included four takeaways for applying the information in this paper as breakeven calculations and assumptions in crop budgets will vary from farm to farm.
Profitability Analysis
Each year, corn and soybeans compete for acreage. While crop rotations help maintain soil quality and prevent yield drag, exact 50/50 rotations are not necessary. As a result, and to an extent, producers base planting decisions on overall profitability of each crop. The soybean-to-corn (soybean/corn) price ratio is one of the several tools that can be used to measure and compare profitability between the two commodities.
Figure 1 shows the ratio of daily soybean and corn prices for November and December 2023 delivery from January 1, 2021, through December 8, 2022. The 30-year average for the ratio is 2.48 (yellow line). This is the point at which the profitability of planting, harvesting and storing corn and soybeans is similar. Generally, a relatively low ratio signals corn may be more profitable, while a higher ratio favors soybeans.
The soybean/corn price ratio for 2023 November and December futures contracts in Figure 1 is below the 30-year average, beginning in the fourth quarter in 2021 through 2022. This trend provides a market signal that the relative profitability of corn may be greater than that of soybeans.
Figure 1
Breakeven Analysis
The current market incentive to plant corn poses an interesting question for producers: Does corn pencil out even accounting for fertilizer prices? The answer lies in knowing your true breakeven for corn vs. soybeans. Here, we use cost of production data from cash budgets from the University of Illinois, Purdue University, USDA, and real-time fertilizer price data from DTN to examine break evens for the two crops. We also assume a $325 per acre cash rent for this analysis, but also need to note that there is considerable range around cash rent prices that will impact producer returns and breakeven outcomes. None of the examples below take basis into account.
Breakevens will be determined for two time periods to highlight the impact of rising fertilizer prices:
- August 26, 2022, when the price of anhydrous ammonia bottomed before reversing higher;
- December 1, 2022, for more current fertilizer prices.
On August 26, 2022, Iowa fertilizer prices averaged $1,182 per ton for anhydrous, $1,073 per ton for MAP, and $891 per ton for potash. November and December 2023 corn and soybean futures at the time closed at $6.16 and $13.81 per bushel. The soybean/corn price ratio was 2.24.
The Figure 2 and 3 tables show producer returns based on price and yield outcomes, Figure 2 for corn and Figure 3 for soybeans. The yellow tabs in Figure 2 indicate a 220-bushel corn crop would require a breakeven price of $5.55 per bushel. Alternatively, the blue tabs indicate a December 2023 corn futures price of $6.16 would be equivalent to producing 199 bushels per acre to break even. Producing a 220-bushel corn crop at $6.16 per bushel would result in a producer return of approximately $134 per acre.
A 65-bushel yield for soybeans would require a price of $13.29 per bushel to break even. With November 2023 soybean futures trading at $13.81 per bushel, an expected yield of 65 bushels would result in a producer return of $34 per acre. A producer would need a yield of 63 bushels of soybeans to break even at $13.81.
In preparing crop budgets, numbers on the cost and revenue side change based on market and production dynamics. As a result, breakevens will fluctuate. Of the non-land direct costs, fertilizer generally constitutes the largest cost. Around the beginning of December, Iowa fertilizer prices were $1,496 per ton for anhydrous, 26% higher than on August 26, 2022; $1,032 per ton for MAP, 3.8% lower; and $878 per ton for potash, 1.5% lower.
The increase in anhydrous ammonia during the past three months has impacted margins for producers who haven’t locked in their fertilizer needs. On the commodity side, December 2023 corn futures decreased $0.20 per bushel to $5.96 per bushel, while November 2023 soybean futures increased $0.17 per bushel to $13.98 per bushel. This put the soybean/corn price ratio at 2.35 – up from 2.24 on August 26, 2022, but still signaling a relative price that favored corn.
Holding other costs of production constant, Figures 4 and 5 show corn and soybean breakevens with Iowa fertilizer prices reported around the first of December.
The increase in anhydrous ammonia in the past three months was a significant and specific driver of a higher breakeven for corn. The three-month price increase adds $0.17 per bushel to a corn crop of 220 bushels per acre. The decrease in MAP and potash does little to offset the impact of anhydrous ammonia. The overall increase in fertilizer prices (at 220-bushel corn yields) was equivalent to $0.16 per bushel.
Because of fertilizer prices, the new breakeven price on a yield 220 bushels increased from $5.55 to $5.71 per bushel. At the December 2023 corn futures price of $5.96 per bushel, corn yields of 211 bushels are required to break even. If corn yield expectations are met at 220 bushels, a $5.96 price returns about $55 per acre – but both yield and price are at the margins. Soybeans benefit from needing only MAP and potash, but fertilizer needs can vary for soybeans. The slight decline in their prices in the past three months means the breakeven price to produce 65-bushel soybeans dropped to $13.25 from $13.29. If corn and soybean yields meet expectations at 220 bushels and 65 bushels respectively, at $5.96 and $13.98 prices, producer returns would be $55 per acre for corn and $49 per acre for soybeans. However, producer returns can vary greatly if yield expectations aren’t met.
Profits in corn and soybeans exist in 2023, but risk remains high. And while corn requires more and costlier fertilizer, it can “pencil out. Based on current market prices, corn does not look to be ceding acres to soybeans in 2023.
Conclusion
It is critical that producers be in the mindset of managing and understanding their expected margins for 2023, especially at a time when cash rents and inputs such as fertilizer are priced high.
Continuous monitoring of costs, as well as the soybean/corn price ratio, will be key. Another issue to monitor is the price behavior between corn and soybeans ahead of February, when USDA establishes the spring crop insurance price. With a sound risk management strategy and appropriate price floors, producers will minimize the risk and be better positioned to capture profit opportunities in 2023.
Budgets will differ from one operation to the next and this paper does not represent all corn and soybean farms. The numbers used in this analysis can be higher or lower than those of a specific farm. The intent is to help producers consider, strategize, and visualize their margins. The better you understand per-acre margins according to different price and yield situations, the better your decisions and actions will be as market conditions change. As such, four takeaways can be taken from this analysis:
- Corn and soybeans are in tight supply and will be competing for acres in 2023. Continue monitoring the soybean/corn price ratio.
- Continue tailoring crop budgets to current market conditions. Markets can quickly change in a volatile environment. Remember, volatility is a two-way street. While volatility can expose downside risks to margins, it can also provide upside opportunity.
- Profits for 2023 exist, but risks remain high. When risks to margins are high, it’s important to know, understand, and visualize how expected margins compare against a range of price and yield outcomes.
- It’s important to work with your financial officer to talk through your cost and revenue assumptions and what they mean to your overall return. Identify risk management tools that will help mitigate your downside risks.
Appendix
How We Got Here
The soybean/corn price ratio is but one market signal. To understand how we got here, it’s worth reviewing the factors shaping markets.
The story for corn and soybeans in 2022 centered on low supply, high demand, high input costs and black swan events. Record fertilizer prices drove producers away from corn, even as demand for U.S. corn increased due lower availability from war-torn Ukraine. The soybean/corn price ratio declined to an almost decade low of 2.1. Between October 1, 2021, and mid-May 2022, December 2023 corn futures rallied 34% while November 2023 soybean futures rallied only 17%. The soybean/corn price ratio has seen several peaks and valleys, beginning in June. USDA acreage reports, stocks-to-use ratios and rising interest rates have each contributed to movement in the price ratio.
Since August, U.S. corn and soybeans have been in a weather market driven by drought. While USDA’s August WASDE pegged U.S. corn yields at 175.4 bushels per acre, August crop tours across much of the Corn Belt estimated 168 bushels per acre. Since then, USDA has adjusted down its 2022/23 U.S. corn yield projection. At 172.3 bushels per acre, it is below the 30-year trend for corn. Meanwhile, U.S. soybean yields are expected to be down only slightly, from 51.9 to 50.2 bushels per acre.
Yield concerns for U.S. corn have pushed down the soybean/corn price ratio to 2.15 from 2.3. December 2023 corn futures rallied 10%, while November 2023 futures increased 3%.
Moving forward, markets expect tight stocks relative to use, domestically and globally, due to drought in the U.S. and South America and the Russia-Ukraine war. Simply put, the world needs both corn and soybeans acres.
U.S. corn ending stocks are at their second lowest since marketing year 2012/13, as is the domestic stocks-to-use ratio of 8.9%. The global corn stocks-to-use ratio is 25.5%, 1.4 percentage points below the 10-year average. Soybeans are in a similar situation, with ending stocks at their lowest level since marketing year 2015/16.
The completion of the U.S. harvest means focus turns to South America. Markets also continue to be impacted by the war between Russia and Ukraine. With these factors ongoing, expect corn and soybeans to fight for acres in 2023.
