Market Morsel: Getting corny
The most important crop in the United States is corn. The advancement in biotechnology has seen tremendous increases in crop yields. This has reflected in better profit margins for corn. If however wheat had a stronger price ratio would they grow more?
An area we keep an eye on is the ratio between commodities, as this can point towards potential moves in crop area. On average since 2010, corn has been priced at 80% of the value of wheat. The ratio is currently low at 65% of the price of wheat.
The forward curve (explanation here) is a valuable tool, as it provides some insights into what can be locked in.
The corn-wheat ratio forward curve at present is exhibiting a similar pattern to August 2018, with the ratio steadily increasing further into the future. As we can see the ratio during August 2019 was at a much stronger level, at greater than 80% of the price of wheat.
In theory, as wheat becomes more valuable in comparison to corn, then it should encourage growers to switch crops. In reality, I am doubtful that this will occur.