By Bill Burton, Oklahoma State Unversity & Mark Welch, Texas AgriLife Extension
In 2008, U.S. farmers brought soybean planted acres back in line with where they had been over much of the last ten years. As producers make planting decisions in 2009, they are faced with high fertilizer prices, tight credit, and prices well below the record levels seen last summer.
With low carryover stocks and strong demand trends from the feed, food, and fuel sectors, the fundamentals of the soybean market look strong. With lower fertilizer requirements, lower per-acre input costs, and the agronomic benefits from a traditional corn/soybean rotation, we could see a further increase in U.S. soybean acres.
That has been the response of farmers in Brazil and Argentina. Along with the United States, Brazil and Argentina account for 81% of the world’s production of soybeans and 90% of world trade. Producers in the Southern Hemisphere plant soybeans and corn primarily in November and harvest in February. They have had to make planting decisions in the fall of 2008 facing the same issues U.S. producers will likely see in the spring of 2009: high input costs, tight credit, and falling prices. Brazilian farmers responded with a reduction in corn plantings of 1 million acres (-3%) and in increase in soybean acres of 500,000 (+1%). Argentina’s farmers are expected to plant 1.7 million fewer corn acres (-21%) and 3.5 million more soybean acres (+8%). While there are many factors that play into a farmer’s final planting decisions (such as farm policy, production and marketing infrastructure, availability of inputs), the response of these growers in the current economic climate is to plant more soybeans.
Budgets prepared for planning purposes in 2008 showed that the price ratio between soybeans and corn needed to be about 2.5 to attract soybean acres away from corn. That ratio was achieved in late February as farmers were making financing, planting, and crop insurance decisions. As a result, soybean planting in 2008 increased over 2007 by over 12 million acres (+19%). While much depends on what input prices do this winter, early budgets prepared by extension economists in Illinois show that a price ratio of 2.5 is still needed for net returns from soybeans to equal corn.
The key to making planting decisions is to know your net return from alternative crops. This is especially important in times when your operating budget is squeezed by rising input costs and falling output prices. Each farm and situation is different and budgets should be developed accounting for the particulars of each individual operation.
When you know, to the best of your ability, your cost of production and estimated breakeven price, it gives you confidence to make marketing decisions that protect your crop investment. Take for example a producer wanting to craft a minimum price safety net for soybean production using put options. By knowing his production costs, he can evaluate various strike prices and premiums and the degree to which each covers his variable costs and total costs. In times of low prices, market volatility, and a good bit of time to expiration, the most we may be able to afford is to cover out of pocket costs. With options, we have a price floor that limits how far our expected price can fall and still allows us to profit if prices go higher.