Figuring the Odds

If you’re a corn and soybean farmer or an ag commodity futures trader, one of the biggest make-or-break days of the year looms: On March 31, the U.S. Department of Agriculture (USDA) will issue its Prospective Plantings report.

      The much-anticipated report is the world’s first look at USDA’s best estimates for the upcoming year’s planted acreage of major U.S. crops like corn, soybeans, wheat, and cotton. Market bears and bulls usually find enough news in the report to rattle prices for weeks.

      This March’s numbers are even more anticipated than usual because key ag markets like corn, soybeans, and wheat—driven by shrinking U.S. supplies and continued high demand globally—are putting in their strongest performances in years.

      That means U.S. farmers might be able to do what they do best—plant big acres and deliver big crops without prices falling to knee-shaking levels.

      Just how big?

      USDA offered a preview of 2021 planted acres in its mid-February Outlook Forum. In round numbers—none tied to actual survey data—it guessed U.S. farmers could plant 92 million acres of corn, 90 million acres of soybeans, and 45 million acres of winter and spring wheat. If accurate, the combined acreage for corn and soybeans, at 182 million, would top 2017’s record 180.3 million acres.

      More importantly, USDA’s 2021 soybean estimate is 6.9 million acres more than what U.S. farmers planted in 2020. While that’s an enormous boost, (the overall crop, at an estimated 4.5 billion bu., would be up nine percent from last year) USDA guesses 2021/22 soybean prices will average $11.25 per bu., or “slightly” better than last year, because more farmers will use today’s good futures prices to price tomorrow’s crop.

      Well, it can hope.

      Where soy gets the acres is equally hopeful. USDA believes today’s strong prices will draw some Northern Plains spring wheat acres to soybeans (likely) and almost 2 million acres of planned cotton will, instead, be planted in soybeans. (Equally likely.)

      Also, the “unusually high level” of unplanted acres across the Midwest in the last two years will return to “normal” and soybeans will sprout on many of them. (This is what USDA sounds like when it guesses.)

      That’s the February, no-farmers-surveyed case.

      The March, farmers-surveyed Prospective Plantings report may confirm that bias, say market seers. If so, today’s November futures market, dancing around $12.50 per bu., appears comfortable with an estimated 90-million-acre soybean crop on the horizon.

      Of course, if USDA finds more than a 90-million-acre crop in the offing, futures prices could take a hit.

      The silver lining to that cloud, however, is that added soybean acres means fewer corn acres because the acres have to come from somewhere.  So, what’s bad for beans will be good for corn.

      But will farmers give up corn acres to grow more soybeans in 2021?

      That might be a hard fight, write Brent Gloy and David Widmar in a March 15 blog for their firm, agricultural economic insights, or aei.

      The straightforward math (using 2021 Purdue University crop budgets) show a clear, $20-per-acre profit advantage to grow soybeans over corn, mostly because variable costs to grow beans ($249/acre) are considerably less than corn ($436/acre).

      But what happens to that advantage when corn and soybeans are both enjoying strong markets, like this year, and—for argument’s sake—you encounter a stellar production year? In other words, what’s “the operating leverage” of one crop over the other in good years?

      To the aei team, the advantage then falls to corn. They say it this way: “In 48% of the observations, or about half the time, corn would generate a larger contribution margin than soybeans, even with soybeans’ ‘on average’ advantage.”

      Most farmers state this concept differently. They put it this way: “just prefer to plant corn, all things being equal,” because, in fact, in years like 2021, all things aren’t equal: corn can be a big winner.

      But betting on that would be like betting on the Prospective Plantings report. No thanks, but good luck.

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