The soybean/corn ratio is a popular topic at springtime, known for its role in the annual rite of guessing planting acres. It’s a shame that most of us (myself included) tend to ignore this ratio the rest of the year because the ratio itself has been stable for decades and offers valuable clues about the future prices of both grains.
A monthly chart of the soybean/corn ratio since 1980 shows that it has spent most of its time between 2.00 and 3.20. The ratio’s 10-year average is at 2.45 and has not moved much over the entire period. The current ratio of 3.31 on Friday’s close marks the sixth time that the ratio has exceeded 3.20 since 1980. I was interested to see if the previous five times could teach us anything about what to expect this year.
Fundamentally, there is good reason for the prices of these two commodities to not get too far away from each other. Corn is known primarily as a feed starch and soybeans are known for their protein content, but both grains offer starch, protein, and oil. When soybean meal prices get high for example, demand also increases for corn’s protein product, distillers’ grains. For decades, a rough balance between the prices of the two grains has been maintained and that seems likely to continue.
When spot soybean prices become more than 3.2 times the price of spot corn, past behavior shows that we should expect the ratio to correct back to more normal values in the next six to 12 months. The question becomes, does this normally happen by corn prices going up, soybean prices going down, or by both happening together?
I admit that five occurrences are a small sample, but that’s all we have over the past 36 years and the results were remarkably consistent. Six months after the soybean/corn ratio hit a high point, spot corn prices increased by an average of 4% while spot soybean prices declined 20%.
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Twelve months after the ratio’s peak, spot corn prices were down an average of 1 percentage point while spot soybean prices were down 22 percentage points. If the past five times are any indication, it appears that an unusually high soybean/corn ratio is more bearish for soybeans than it is bullish for corn.
Of course, the soybean/corn ratio is not the only factor to consider this year.
Technically, soybeans are still in an uptrend while corn is not. New-crop spreads in soybeans and meal are both showing bullish inverses while corn spreads are not. And we just found out from USDA that corn acres are expected to be up 7% in 2016 while soybean acres are expected to only be up 1%.
The way things are going, the outlook remains more bullish for soybeans than it does for corn, and I don’t see any sign of that changing just yet. However, given the history of the soybean/corn ratio over the past few decades, there is reason to be wary about how much higher soybeans might go. And of course, this summer’s weather will have a lot to say about how all this turns out.
Todd Hultman can be reached at firstname.lastname@example.org
Follow Todd Hultman on Twitter @ToddHultman1