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"The model correlating the level of year-ending stocks to the
marketing-year average price suggests a marketing-year average
price near $5 for this year," said Darrel Good. "Such a low
average will not materialize, since prices for the rest of the
year would have to average near $4, but it appears that there is
still a large amount of weather risk reflected in current
prices. "Price declines could be substantial if significant
production problems do not surface."
Good's comments came as he reviewed soybean prices. Soybean
prices moved sharply higher in December but gave up much of the
gain in the first three weeks of January. A number of factors,
he said, will influence price direction over the next several
weeks.
March 2006 soybean futures traded to a low of $5.53 in late
November 2005 and rallied to a high of $6.33 on Jan. 4. November
2006 futures moved from a low of $5.755 to a high of $6.485
during the same period. Finally, the average cash price of
soybeans in central Illinois reached a low of $5.15 in early
October 2005, increased to $5.75 by mid-November, declined to
$5.40 by the end of November and rallied to a high of $6.05 on
Jan. 4.
"The sharp increase in prices from late November to early
January came without an obvious fundamental reason," said Good.
"The pace of exports during that period was well below the
projected rate for the year; the pace of soybean meal
consumption was below the projected rate; soybean oil stocks
were growing; and projections of stocks at the end of the
current marketing year were increasing.
"Dryness in parts of Argentina was the one supportive
fundamental factor. Much of the price strength was attributed to
aggressive speculative buying."
Improved weather conditions in Argentina, along with more
negative USDA supply and consumption forecasts on Jan. 12,
combined to push soybean prices sharply lower so far in January.
March 2006 futures declined to a low of $5.64 last week, barely
above the late November low. November 2006 futures traded below
$5.95, about 55 cents below the early January high, and the
average cash price in central Illinois declined to $5.39, 66.5
cents below the early January high.
"Price direction over the next several weeks will be
influenced by a number of fundamental factors," said Good. "One
of those factors will be the development and ultimate size of
the South American harvest. Most observers seem to agree that
prospects are still in place for a record soybean harvest in
Brazil in 2006. The USDA forecast that crop at 2.15 billion
bushels, while Brazilian sources put the crop potential at about
2.13 billion.
"Both projections are well above the record production of
1.95 billion bushels last year. More uncertainty centers around
the crop in Argentina, due to early dryness and periodic
episodes of stressful weather."
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 The USDA currently forecasts the Argentine crop at 1.49 billion
bushels, 55 million larger than the 2005 harvest. That forecast may
decline a bit, but if the Brazilian crop remains in relatively good
condition, total South American projection will likely exceed that
of a year ago, Good noted.
"A second fundamental factor important for soybean prices is the
pace of Chinese buying of U.S. soybeans," said Good. "China bought
at a very rapid pace during the first half of the 2004-05 marketing
year, but the pace has been much slower this year."
Through Jan. 12, cumulative shipments of U.S. soybeans to China
since Sept. 1, 2005, totaled 189 million bushels, 85 million less
than cumulative shipments of a year ago. The USDA also reported that
as of Jan. 12, about 60.5 million bushels had been sold to China but
not yet shipped.
"A year ago, those unshipped sales stood at 65.5 million," noted
Good. "Large sales to China, however, were reported in the most
recent reporting week, renewing optimism that China will accelerate
purchases of U.S. soybeans. The window for that increase is fairly
narrow, as the South American crop will be available in the spring."
A third factor with potential to affect soybean prices is the
magnitude of soybean acreage in the United States in 2006, Good
added.
U.S. soybean acreage declined by 3.066 million acres from 2005 to
2005, with plantings at the lowest level in seven years.
"Many expect that acreage will increase in 2006 due to escalating
costs of corn production," he said. "The dilemma, of course, is that
with a large South American harvest and prospects of a
500-million-bushel year-ending inventory in the United States, an
increase in acreage is really not needed unless the 2006 U.S.
average yield falls well below trend value.
"The USDA will survey producers in March and release the
prospective plantings report on March 31."
The USDA now forecasts the 2005-06 marketing-year average farm
price in a range of $5.10 to $5.80. The average during the first
five months of the marketing year, with more than 60 percent of the
crop likely already priced, will probably be near $5.75.
"To average near the midpoint -- $5.45 -- of the USDA's projected
range, the last 40 percent of the crop would need to be sold at an
average price of about $5," said Good. "At the close of trade on
Jan. 20, the futures market reflected an average cash price for the
remainder of the year near $5.60."
[University
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release]
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