Corn, or Soybeans? Both?
Teucrium | February 11, 2021
Corn, or Soybeans? Both?
For those who have been following along the last 6 months have been exciting as both corn and soybean prices have advanced to 6- and 7-year highs, respectively. Now, both markets appear to be at a juncture. Farmers will soon need to decide how much of each crop they will plant. Investors may also be trying to decipher which of the two markets has the greater potential for further price appreciation. Unlike farmers, investors have the luxury to be able to say “both.”
Chart created by Teucrium using Bloomberg Finance LP on 02/10/2021. Front Month Corn and Soybean Futures Percentage Appreciation – 1 Year Chart
The price advance in corn and soybeans has largely been driven by record demand for both crops. China’s grain buyers are likely to take a breather for the next week as the country enjoys the Chinese New Year celebrations.
Upon returning to work the buyers are likely to be keying in on the Brazilian soybean harvest. Early season planting delays and recent rains have contributed to a late Brazilian soybean harvest. Still, Brazil is expected to produce a record 133 million metric tons (MMT) of soybeans, and the harvest is just getting underway. It is likely that Brazilian sales to China begin detracting from US business by the end of February or the beginning of March. A seasonal slowdown in the pace of US sales to China has the potential to weigh on US soybean prices. But once again, this is very much expected from the US marketplace.
At the same time, the trade is beginning to take a much closer look at US planting intentions for the ’21-’22 crop year. Early estimates suggest that the combined corn and soybean acreage is likely to be a record, yet the question remains, will farmers opt to plant more corn or soybeans?
As of this writing, it appears that due to profitability and price comparisons, soybeans have the edge. Fundamentally, this makes sense as the official US estimates show the soybean balance sheet to be considerably tighter than corn. You can view our WASDE Summary Chart HERE.
Traditionally, farmers will look to plant soybeans over corn when the December Corn / November Soybean ratio exceeds 2.40, currently that ratio is 2.62. However, prices change rapidly, and farmers can react quickly if necessary. Note that markets will receive the first indication of planting intentions on February 19th coinciding with the 2nd day of the USDA Agricultural Outlook Forum.
For the investor, consider that more acres planted suggests a higher supply at harvest, that is assuming trendline yields. If US farmers increase soybean acres at the expense of corn, that could mean a tighter corn balance sheet for the ’21-‘22crop year. Some investors may choose to leave the decision to the famers and then place their monies in the opposite market. For example, if famers plant more soybeans, then an investor might opt to buy corn, or vice versa.
Of course, investors have the benefit of investing in both corn and soybeans and can equal weight the commodities in their portfolio if they so choose. Some investors with whom we speak have gone a step further and considered investing in our TAGS ETF for broader agriculture exposure. TAGS (the Teucrium Agricultural Fund) holds our four single commodity ETFs in equal weight. An investor in TAGS is gaining futures price exposure to corn, soybean, wheat, and sugar.
Teucrium Agricultural Fund Holdings Ticker: TAGS
Among the grains, soybean prices have led the way so far. Whether or not soybean prices continue to lead in the ’21-’22 crop year depends largely, though not exclusively, on the amount of soybean acres planted relative to corn.
Famers will have to choose which crop they want to allocate more acres to. Investors can also choose corn, soybeans or both. Note that with prices near 7-year highs, both the corn and soybean markets are likely to remain volatile. We believe however, that the downside might be limited since supplies for both corn and soybeans are low relative to expected demand.