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Using
July soybean futures to illustrate recent price fluctuations,
soybean prices peaked at $10.64 in early April, declined to $9.21,
traded to $10.36 on May 12 and settled at $9.324 on May 14. November
futures have followed a similar pattern, establishing a high near $8
and settling at $7.14 on May 14. So what has changed in the soybean
market to warrant such a large and rapid price decline?
"Fundamentally, the pace of U.S. exports and export sales of
old-crop soybeans have slowed considerably, China has canceled some
imports of South American soybeans, the domestic crush rate is
slowing dramatically, the 2004 U.S. planting season has been
generally favorable, and the market seems to have a renewed
awareness that U.S. imports of soybean products will likely occur
this summer," said Good.
In
addition, he says the USDA's May forecast of the size of the South
American crop was not as small as expected, and the first
projections for the 2004-05 U.S. marketing year served as a reminder
that a favorable growing season would result in a much larger supply
of soybeans. Expanded acreage and a return to trend yields in South
America in 2005 would also result in a return to abundant world
supplies.
"The
current situation of tight U.S. stocks and the need to reduce
consumption of U.S. soybeans this summer has not changed. However,
evidence that consumption is being reduced, along with the
possibility of expanding production, represents a real shift in
market fundamentals," said Good.
As for
corn, July and December 2004 corn futures peaked just over $3.40 in
early April. Settlement prices were near $2.92 and at $2.85,
respectively, on May 14.
"The
decline in corn prices occurred without a clear and significant
change in market fundamentals, suggesting that the late March, early
April price rally was premature," said Good.
On May
12, the USDA increased the forecast of U.S. exports for the current
marketing year to a total of 2.05 billion bushels. The increase
appears warranted, based on the large outstanding export sales, but
will require very large weekly shipments over the final 15.5 weeks
of the marketing year.
Based
on the estimate of cumulative exports in the USDA's weekly export
sales report, weekly shipments need to average 45 million bushels
from now through August to reach the projection.
"Through the first 36.5 weeks of the year, weekly shipments were at
that level only three times," said Good.
As
expected, the USDA's initial projections for the 2004-05 U.S.
marketing year were for a record crop, record consumption, a decline
in year-ending stocks and a higher average farm price than received
this year.
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"The
futures market is currently reflecting an average price for the
2004-05 marketing year very near the midpoint of the USDA's
projected price range," said Good.
For
wheat, July wheat futures at Chicago peaked near $4.30 in early
April and settled at $3.584 on May 14.
"This
decline came without any significant changes in the fundamental
picture, again suggesting that the earlier rally was not fully
supported by market fundamentals," said Good.
The
USDA's forecast of the 2004 U.S. winter wheat crop of 1.55 billion
bushels was very near the average trade guess. That forecast is 156
million bushels smaller than the 2003 harvest. However, the first
world forecasts for 2004-05 indicated prospects for large increases
in production in Europe, Russia, Ukraine and India. A smaller crop
is expected in China.
"A
larger world wheat crop during the year ahead would likely result in
a sharp decline in U.S. wheat exports. The USDA projects a decline
of 195 million bushels, or nearly 17 percent, from shipment of the
current marketing year," said Good.
For
the next several weeks, corn and soybean prices will be influenced
by the development of the 2004 U.S. crops. In addition, the rate of
domestic consumption of soybeans and import developments for soybean
products will also be important.
"With
a favorable growing season and production near the level projected
by the USDA, soybean prices will likely decline further. Even
new-crop prices, which are at a sharp discount to old-crop prices,
have more downside potential. Those prices are still near the upper
end of the range of the average farm price forecast by the USDA.
Soybean prices could remain very volatile, however, with periods of
sharply higher prices," said Good.
He
says corn prices should have less downside potential than soybean
prices. Lower prices would likely come if the June 30 acreage report
shows that planted acreage is well above March intentions and
growing conditions remain favorable.
"Wheat prices are more
difficult to anticipate, due to the influence of world crop
conditions. A decline of July futures (Chicago) to the $3.40 to
$3.50 area cannot be ruled out if world crop conditions remain
favorable. Upside may be limited to the $4 area," he said.
[University
of Illinois news release]
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