Corn and Soybean Prices
Let’s discuss corn and soybean prices. We already know that prices stem from demand and supply. Here, briefly discuss the supply dynamics for corn and soybean. it’s time to discuss the demand projections for these two crops.
Long-term demand growth
In the above chart, we can see the trend of the USDA (US Department of Agriculture) data for historical demand for corn and soybean. We can also see Monsanto’s (MON) projections for demand in the future.
Demand for corn over the past decade has grown at an average annual rate of 3.2%. Over the next decade, Monsanto projects this growth to slow down by 0.7%–2.5% annually.
Similarly, soybean demand in the past decade grew at 4.0% annually. It is projected to grow at 3.7% annually over the next decade. In its recent presentation, Monsanto stated that meeting this demand trend would likely require two-fold and four-fold increases in corn and soybean yield rates.
But while the demand outlook for the long term is on an upward trajectory, short-term demand may experience volatility. Volatility, as we know, puts pressure on crop prices which isn’t a positive sign for farm economics.
Risk management agency (RMA) recently released the projected prices of corn and soybean for the 2017 crop insurance year. The projected prices reflect the current value of a commodity for delivery in the fall at harvest. They also represent an important component. This is used in determining how much liability can be transferred to insurance company.
The higher the projected price, the higher the amount of liability; however, an increase in liability also means higher premiums. Another factor influencing producer premiums comes from the volatility factor. The volatility factor provides information on the dispersion of where prices could end up when we reach harvest. Higher volatility implies a wider range of where prices could end up at harvest and therefore a higher premium.
Due to the increase in both projected prices and volatility factors from 2016 to 2017 for corn and soybeans, producers should expect to see an increase in insurance premiums, primarily those coming from products protecting revenue, such as revenue protection (RP). Increases in premiums due to price increases indicate there is a larger amount of liability being transferred to the insurance company and in the case of the increased volatility factor, a larger probability of even lower prices come fall.
Producers should consider the benefit of additional liability transfer and price risk (volatility factor) before switching to a lower premium product due to an increase in premiums from 2016 to 2017.