Let me admit up front that I am a fan of the late Peter Drucker. Not that I knew him personally or even appreciated his work when it was assigned reading in college. But as I came to find out later, he had a keen eye for understanding how business worked in the real world and left behind a valuable legacy of advice for how we all could make better decisions.
After Friday’s Grain Stocks report from USDA, I was going over the numbers with DTN Senior Analyst Darin Newsom and was saddened to see the on-farm totals for corn and soybeans. As of Sept. 1, USDA discovered 627.4 million bushels of corn and 41.6 mb of soybeans stored on U.S. farms, a 15-to-1 ratio in favor of corn that was even more lopsided than last year’s corn preference of 12 to 1.
My first thought was why? Why would farmers be storing corn and letting go of soybeans in this market environment? I suspected Newsom’s article earlier Friday held the clue to what many are thinking.* An email he received from a reader in ag banking explained that corn was so far below its production cost that many were willing to give corn time to find a higher price.
My second thought turned to Professor Drucker and one of his stories about Macy’s that I vaguely recalled. A little digging found the lesson in chapter 3 of his 1985 book, Innovation and Entrepreneurship.
As Drucker tells it, shortly after World War II, Macy’s experienced an upswing in appliance sales. Most of us would think that was good news, but the management at Macy’s saw it as an intrusion because fashion sales were traditionally 70% of their business and they did not want that to change. They even took steps to discourage customers from buying appliances.
Bloomingdales on the other hand, correctly saw the opportunity and actively promoted appliance sales at their stores. As you can imagine, Bloomingdales prospered from its decision and was rewarded with increased market share.
A half-century later, that small example of what not to do seems obvious, but I suspect this year’s decisions to plant and store more corn are just another version of trying to hang on to fashion sales while ignoring that appliance sales are booming.
For the past 30 years, world demand for soybeans increased 210% while corn demand increased 108%. In the past ten years, world soybean demand increased 41% versus corn’s 32%. The world clearly has an increasing appetite for the protein that soybeans provide. Yet, when it came time to plant U.S. crops this spring, it was corn acres that saw the bigger increase of 6.1 million acres compared to 1.0 million acres for soybeans.
Since production cost was mentioned as a possible reason for holding corn, let’s consider the history of those costs. Going back to 1980, and looking at years that are not disrupted by significant weather problems, December corn prices tend to trade in a range between their production cost, excluding land expense, and a 50% premium to cost.**
A similar look at January soybeans finds prices tend to trade between a 20% premium and an 80% premium above their production cost. Not only has world demand shown a greater appetite for soybeans, but the world has shown a consistent tendency to offer a more profitable price for soybeans. The market’s message seem fairly clear: The world is trying to reward the providers of soybeans.
The decision to store grain can be complicated and often gets clouded by what we expect future prices to do. For a little guidance, I turned to the data in DTN’s ProphetX software for DTN’s national indices of cash corn and soybean prices.
The data showed that storing corn from Sept. 30 to May 31 each year resulted in an average gain of 49 cents a bushel. Of course, not all years went well and, in five of the 23 years, the price of corn showed a loss over the eight-month period.
By contrast, storing soybeans over the same eight-month period resulted in an average gain of $1.15 a bushel and showed only three years when prices ended lower. Because storage costs are the same for a bushel of corn as they are for a bushel of soybeans, it is easy to say that soybeans has been the better choice for those wanting to store grain.
What about the idea mentioned above of storing the grain that is less profitable at harvest time? I also looked at that using USDA’s cost of production estimates. Had one stored the less profitable choice of either corn or soybeans for eight months each year, he would have grossed 84 cents a bushel on average, before storage costs. While the idea wasn’t bad, it was not as profitable as just storing soybeans every year.
It is fair to point out that none of the data above can tell us which grain, if any, will pay to be stored this fall, and that makes the decision more complicated. However, I am compelled to point out that the track record of storing corn instead of soybeans has been as bad as Macy’s decision to ignore appliance sales.
The grain selling off of today’s shelves the fastest is soybeans and the world’s customers are willing to reward those paying attention. I cannot guarantee what prices will be in 2017, but a little business sense and the price record of the past 23 years suggest that soybeans will continue to be the more profitable grain to store.
* “Questions That Lead to Short Nights, Early Mornings” by Darin Newsom, Sep. 30, 2016 at (subscribers only)
** USDA’s estimate of land expense is excluded from this comparison because actual amounts vary widely among different farm situations.
Todd Hultman can be reached at email@example.com
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