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"Current average price forecasts are relatively close, although
the futures market and the stocks-to-use model projects an
average near the upper end of the USDA's forecast range," said
Darrel Good. "As the marketing year progresses, the judgment of
whether current prices are too high or too low will be based on
the rate of U.S. and world consumption relative to the supply of
soybeans. "A slow rate would suggest that prices need to move
lower and vice versa. That relationship will be relatively easy
to monitor for the United States, particularly following the
November production forecast. However, the prospective world
supply of soybeans will remain uncertain until well into the
South American growing season."
Good's comments came as he reviewed the outlook for soybean
prices. The last two USDA reports have provided friendly supply
data for soybean prices.
November soybean futures traded under $5.60 in late September
but rebounded on the basis of the USDA's smaller-than-expected
estimate of Sept. 1 soybean stocks, he noted. The contract
traded under $5.60 again in early October but rebounded nearly
50 cents following the USDA's smaller-than-expected October
production forecast.
"The U.S. average yield forecast of 41.6 bushels per acre was
very close to market expectations, but the production forecast
of 2.967 billion bushels was about 40 million bushels less than
expected, due to a reduction in the estimate of planted and
harvested acreage," said Good.
The USDA's World Agricultural Outlook Board projects 2005-06
marketing-year consumption of U.S. soybeans at 2.966 billion
bushels, resulting in year-ending stocks of 260 million bushels.
"Assuming all current production and consumption forecasts
are correct, what should we expect the 2005-06 marketing-year
average farm price of soybeans to be?" Good asked. "Soybean
prices are determined by the value of soybean oil and soybean
meal. The USDA forecasts the marketing-year average price of
soybean oil in a range of 22 cents to 25 cents per pound, and
soybean meal is expected to average between $155 and $185 per
ton.
"The result is an expected marketing-year average price of
soybeans between $5 and $5.80 per bushel."
Good added that as the marketing year unfolds, the forecasts
of consumption and year-ending stocks will likely change.
"Many analysts look to the ratio of year-ending stocks and
annual consumption of soybeans -- stocks-to-use ratio -- to
gauge the likely value of soybeans," he said. "This is a
'shortcut' method of summarizing the fundamental
supply-and-demand conditions of the market. Historically, there
was in fact a strong relationship between the ending
stocks-to-use ratio and the marketing-year average farm price."
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During the period 1989-90 through 1997-98, the stocks-to-use ratio
explained nearly 90 percent of the annual variation in average farm
price, he noted. That relationship shifted and became much more
variable during the period 1998-99 through 2004-05.
"In general, for a given stocks-to-use ratio, the average farm
price was lower in the latter period than in the earlier period, but
the ratio only explained about 55 percent of the annual variation in
farm price," he said.
"For the past two seasons, the annual average farm price has been
almost exactly halfway between the price forecast by the model based
on the period 1989-90 through 1997-98 and the price forecast by the
model based on the period 1998-99 through 2004-05. A similar result
this year would result in an average farm price of about $5.70 per
bushel, based on current production and consumption forecasts."
At any given time, the futures market reflects the market's
expectation of the average price for the remainder of the season, he
added. The futures price can be translated into an average farm
price by a two-step procedure.
First, for each month in the marketing year, the relevant futures
price is translated into an expected U.S. average farm price by
adjusting for the expected difference between the futures price and
average cash price received by producers. The USDA's Economic
Research Service provides a history of that difference, and the
average of the past five years is used here as the expected
difference for this year.
Second, the estimate of the monthly farm price received is
weighted by the expected percentage of the crop marketed each month.
Again, the average of the past five years is used here as the
expected percentage.
"Based on futures settlement prices on Oct. 14 and the estimated
average cash price received in September 2005, this process results
in a calculation of an average U.S. farm price of $5.83 for the
current marketing year," he said.
[University
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release]
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