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"The ability of the soybean market to move to new highs in the
face of negative old-crop fundamentals and the willingness to
respond to concerns about the 2007 crop has resulted in some
attractive pricing opportunities for the 2007 crop," said Darrel
Good, who then noted the challenges facing pricing. "The
prevailing attitude suggests that prices could continue to move
higher, yet there is some risk that the soybean market will make
the same mistake as last year when prices remained relatively
strong and too many acres were planted to soybeans."
Good's comments came as he reviewed recent developments in
the soybean market, where prices have moved sharply higher over
the past two weeks, even with prospects of record South American
production and mounting world surpluses.
"The market is clearly looking beyond the current situation
of burdensome supplies," he said.
The average cash price of soybeans in central Illinois
increased from $6.75 on Jan. 26 to $7.15 on Feb. 9. During that
same two-week period, March 2007 futures increased from $7.10 to
$7.49, with a contract high of $7.57 established on Feb. 9. That
contract had traded as low as $6.60 before the release of the
USDA's Jan. 12 Crop Production report.
"Similarly, November 2007 futures increased from about $7.63
on Jan. 26 to $8.01, establishing a contract high of $8.08 on
Feb. 9," he said. "November 2007 futures have established the
highest high for a November contract since the 1996 contract
reached $8.25 in July 1996. The all-time high is $10.46 for the
1988 contract, reached in June 1988."
Good said the strength in soybean prices on Friday last week
was a bit surprising given the USDA's forecasts of record-large
U.S. and world stocks and a record-large South American harvest,
released in a report before the market opened on Friday.
"Even though U.S. exports and export sales have been brisk,
the USDA lowered its projection of the 2006-07 marketing year
total exports by 20 million bushels, to 1.1 billion," he said.
"That reduction follows a 25-million-bushel reduction last
month. The lower expectations for this year's exports reflect
the larger projection for the upcoming South American harvest.
"The USDA now projects that harvest -- Brazil, Argentina,
Paraguay, Bolivia and Uruguay -- at 3.95 billion bushels, 55
million bushels above the January forecast and 200 million
larger than the 2006 harvest. The largest year-over-year
increase, 130 million bushels, is expected in Argentina. The
large crop in South America should slow the rate of U.S. soybean
exports in the last half of the current marketing year and in
the first quarter of the 2007-08 marketing year."
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 Based on the pace of the domestic crush during the first four
months of the current marketing year, it was generally expected that
the USDA would increase the forecast of the crush for the year.
"Instead, that forecast remained at 1.78 billion bushels," said
Good. "High prices will likely slow the pace of soybean meal feeding
and the use of soybean oil for biodiesel. The forecast of
year-ending U.S. stocks was increased by 20 million bushels, to a
record 595 million bushels. Stocks at that level represent 19.5
percent of expected consumption during the current marketing year.
"That is the third-highest year-ending stocks-to-use ratio
experienced in the United States. The ratio was higher in 1985-86
(28.5 percent) and 1986-87 (21.3 percent). World carryover stocks
are projected at a record 2.1 billion bushels."
The dominant fundamental factor supporting soybean prices appears
to be concern about the size of the 2007 U.S. crop. A decline in
U.S. soybean acreage in favor of additional corn acreage in 2007 has
long been expected.
"However, recent private-sector forecasts about the magnitude of
the switch have been larger than early expectations," said Good.
"These larger forecasts seem to have spooked the market into
thinking that the switch could be large enough to create a shortage
of soybeans in the 2007-08 marketing year.
"With carryover stocks of 595 million bushels and a trend yield
in 2007, soybean acreage would have to decline by more than 12
million acres (16 percent) to suggest a possibility of a shortage of
soybeans next year."
Good added that the worries about reduced acreage are also
apparently being augmented by concerns about the upcoming growing
season. The fading of the weak El Nino weather phenomenon and the
increasing number of references to the similarity to 1988 raise
concerns about a summer drought in the Midwest.
"In 1988, the El Nino faded rapidly and La Nina conditions
emerged to contribute to the Midwest drought," said Good. "The
current concern seems a little premature. Drought events in the U.S.
Midwest apparently do coincide with a rapid transition from El Nino
to La Nina, but not every such transition is associated with a
Midwest drought.
"In addition, most models suggest that the current El Nino will
give way to more normal sea-surface temperatures in Nino Region 3.4
rather than to below-normal temperatures. Current soil moisture
levels are generally more abundant than at this time in 1988."
(Text copied from file received
from the University
of Illinois College of Agricultural, Consumer and Environmental
Sciences)
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