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"The prospects of reduced inventories should result in higher corn
and soybean prices during the 2005-06 marketing year than the prices
experienced during the current year," said Darrel Good. "However,
the increase may be modest unless the crops are small enough to
require rationing."
In the case of corn, a modest decline in use of U.S. crops was
required in the 2002-03 marketing year, due to a crop of just under
9 billion bushels, Good said. Prior to that year, the most recent
year of a significant shortfall in U.S. production was in 1995,
resulting in a record-low ending stocks-to-use ratio and record-high
prices.
For the 2005-06 U.S. corn marketing year, the USDA projects total
use of corn at 10.67 billion bushels, about equal to use during the
current year. That projection includes a 7 percent increase in
exports and a 7 percent increase in the domestic processing use of
corn. Feed and residual use is expected to decline by nearly 5
percent (300 million bushels). That decline implies that residual
use during the current year is significantly inflated, likely due to
an overestimate of the size of the 2004 crop, the specialist said.
"What size crop then would be required to force a reduction in
use during the year ahead? Start by assuming that year-ending stocks
cannot practically be reduced below about 750 million bushels and
that stocks at the beginning of the year will be near the current
USDA projection of 2.115 billion bushels," Good said.
"In that case, a crop of about 9.3 billion bushels would be
required to maintain corn use at the current level. Using the USDA's
June projection of harvested acreage, a crop of that size would
require an average yield of 125 bushels. That yield is well below
current private estimates, which are in the mid- to upper 130-bushel
range. It appears that a reduction in the use of U.S. corn will not
be required during the year ahead."
But how much will stocks be reduced? At the close of trade on
Aug. 5, the futures market prices for the 2005-06 marketing year
projected a marketing-year average farm price of about $2.25. That
price implies that the market expects year-ending stocks near 1.5
billion bushels, Good said.
In the case of soybeans, 2003-04 was the most recent year in
which the consumption of U.S. soybeans had to be reduced because of
a shortfall in production. The small U.S. crop was also accompanied
by a smaller-than-expected South American crop, so that cash prices
above $10 were required to sufficiently slow the rate of
consumption.
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"Currently, annual consumption of U.S. soybeans is near 2.97
billion bushels," Good said. "Stocks at the beginning of the 2005-06
marketing year are currently projected at 290 million bushels.
Assuming that year-ending stocks cannot practically be reduced below
125 million bushels, the 2005 harvest needs to be near 2.805 billion
bushels to maintain consumption at the current level.
"Using the USDA's June projection of harvested acreage, a crop of
that size would require an average yield of about 38.8 bushels. That
is very close to current private estimates of average yield. There
is a significant probability then that the 2005 crop will be small
enough to require a reduction in use."
At the close of trade on Aug. 5, the futures market prices for
the 2005-06 marketing year projected to an average farm price near
$6.35. That price implies that the market is expecting year-ending
stocks only 15 million to 20 million bushels above the minimum level
of 125 million bushels.
The price implication of a small U.S. soybean crop and the
potential need to reduce consumption will depend in part on the size
of the 2006 South American crop, Good noted. "A large harvest there
could result in a reduction in U.S. soybean exports without prices
going to extremely high levels," he said. "Conversely, a third
consecutive shortfall in production would magnify the implications
of a small U.S. crop, much like two years ago."
Good said the USDA currently projects a modest 1.3 percent
increase in South American soybean acreage, a 21 percent increase in
the average yield and a 21.6 percent increase (400 million bushels)
in production in 2006. A crop at the projected level would more than
offset the shortfall in U.S. production and keep world soybean
stocks at a relatively high level.
"New-crop corn and soybean prices have declined sharply from the
June highs," Good said. "With continued crop stress in August, the
market may expect production to be below the USDA August forecast.
Unless the August projections are higher than currently expected,
prices will likely make at least moderate recovery from the recent
sharp declines."
[News release from the
University of Illinois College
of Agricultural, Consumer and Environmental Sciences]
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