2006 Price Risks

New crop corn prices tend to peak about mid-March to mid-April and soybean prices about a month later. At this time of year, the markets often become concerned about production risks during the upcoming year and tend to bid a "risk premium" into prices. If you compare historical price data for December corn and November soybean futures contracts, it's relatively easy to conclude that one of the best times to sell 2006 corn and soybean production may be quickly approaching, if not already here. But each year is different and previous years' price patterns may not apply to the current year. Market signals are confusing with large corn and soybean supplies weighing on prices, but speculative buying and technical trading have pushed prices higher than many analysts predicted during the past year. Demand signals are mixed with relatively good domestic demand and, while soybean exports are disappointing, corn exports are improving. BSE and avian flu add the risk of potential feed demand reductions. Production cost breakevens are high and, although some precipitation has fallen, severe drought in the southern plains and dry soils in other areas add to uncertainty. Are early sales really a good idea this year?

Will corn supply/demand balances improve? Corn ending supplies are expected to be the largest in eighteen years with carryover from 2005 production projected at 2.351 billion bushels (USDA's March estimate). Although most market analysts expect corn acreage to be reduced by about 2%, corn supplies are not likely to run short even if 2006 acreage is reduced. Assuming trendline yields, 2006-07 carryover might be reduced somewhat, but corn supplies can be expected to remain relatively large. Above trendline yields and/or a less than expected acreage reduction could add to already burdensome supplies. It appears that only very serious crop problems and sharply reduced yields would be necessary to reduce supplies enough to generate any supply concerns in the coming year.

Corn demand is encouraging. Feed use remains good and ethanol use continues to increase dramatically as new plants come on-line and others are planned. Drought stress in Argentina and suspension of Chinese corn export credits suggest less export competition and corn exports have improved significantly since the beginning of the calendar year. Most market analysts expect feed and export use to remain solid for the 2006-07 marketing year, along with strong growth continuing in the use of corn for ethanol. The primary demand concerns, for now, are negative impacts on feed use caused by BSE or Avian Flu. However, while demand appears strong, weak cash basis and market carry in deferred month futures contracts suggests that users do not need to bid up prices to tap abundant supplies.

Assuming a 2% reduction in 2006 corn planted acreage and trendline yields, most expect 2006-07 ending stocks to be trimmed somewhat and likely to range from1.7 bill

2.0 billion bushels. This would provide more than adequate supplies to meet demand, but somewhat higher corn prices are possible. USDA's preliminary projection is an average of $2.15 per bushel and FAPRI's baseline estimates suggest $2.10, while other analysts are projecting prices ranging from $1.70 to $2.35. Recent trading in December 2006 corn futures contracts have offered prices ranging above $2.55, considerably higher than most preliminary projections for 2005-06 average corn prices!

The recent corn price uptrend indicates a market that is on-track with historical price patterns and points to a price peak (if it hasn't already occurred) within the next few weeks. Several marketing advisors have been aggressively recommending pre-harvest sales. However, recognizing the production risks ahead, demand strength, and potential for more speculative technical buying, a few analysts have been more cautious. While not as aggressive, these more cautious analysts also recognize the potential pricing opportunity and are encouraging some sales. The production season risks are only beginning and sales typically should be spread out to allow for some surprises, but current bids appear to be offering prices well above expected average prices for the 2006 corn crop! This indicates a pricing opportunity for beginning or adding to pre-harvest sales.

Soybean price outlook remains discouraging. Following last year's record yields and second largest crop ever, 2005-06 ending soybean stocks are expected to reach record levels at 565 million bushels (USDA's March estimate). World soybean supplies also are expected to be a record. While some production problems have occurred in South America, USDA continues to predict large production in the Southern Hemisphere. Large world supplies and South American competition are contributing to disappointing U.S. exports and the expected large domestic carryover. Weak cash basis and market carry in deferred futures contracts also suggest weak demand, users are not bidding prices higher to get soybean supplies for crush or export. Recent price rallies have often been attributed to technical trading or speculative buying rather than supply/demand worries.

Most analysts do not expect the soybean supply/demand or price situations to improve. High fuel and fertilizer costs are expected to shift additional acres into soybean production in 2006 as producers make efforts to reduce cash outlays for operating expenses. The result is the potential for even larger 2006-07 soybean carryover, with planted acreage expected to increase from 1.5% to 2.5% or more. Assuming trendline yields, most analysts are predicting 2006-07 ending stocks ranging from almost 400 million to more than 600 million bushels! Continued record soybean supplies and disappointing demand points toward lower prices. USDA's preliminary average price projection is $5.15 per bushel, the FAPRI baseline estimates $5.02, and other projections range from well below $5.00 to a potential "reduced crop production" high of only $5.75.

New crop (November 2006) soybean futures prices, while down from earlier highs, remain above $6.00 and well above most preliminary average price projections. Although the spring seasonal high typically occurs in April-May, recent price action suggest the market may be offering a fading opportunity as prices have failed to rally back toward previous highs. It appears that beginning to make pre-harvest sales or adding to previous sales at these prices could "lock-in" prices nearly $1.00 per bushel higher than what most are expecting for 2006-07 soybean average prices.

The decision to make early pre-harvest sales never seems easy, but these are often sales made at some of the better prices offered for a crop. Growing season weather and other production risks, along with demand surprises, can always produce other opportunities for price rallies. The markets will also be watching the upcoming March 31 USDA Grain Stocks and Prospective Plantings reports for clues to any potential changes to supply/demand outlooks. However, current analysis of supply/demand factors suggests considerable downside new crop corn and soybean price risk exists under normal conditions. Although at some point prices might conceivably be higher, it doesn't seem likely that making some pre-harvest sales during the time of year that normally produces a seasonal high will be a bad decision.

What about Wheat?

Severe drought conditions in the hard red winter (HRW) wheat production areas of Texas, Oklahoma, and spreading into Kansas have continued to produce declining HRW wheat condition reports. The dry conditions have produced an uptrend in wheat prices, led by Kansas City HRW wheat futures. Soft red winter (SRW) wheat condition reports remain generally good, but Chicago SRW wheat futures have followed on the coat tails of the Kansas City futures price rally.

The wheat price rally is primarily a "weather market" rather than demand driven, as illustrated by the sharp decline in HRW wheat futures prices following the rain events of last weekend and suggests considerable downside price risk also exists. While the rains provided some scattered relief, the drought remains in place and more moisture is needed. In spite of the drought and poor HRW condition ratings, USDA's preliminary 2006-07 projections for all wheat indicate few changes are expected in the year ahead with a supply/demand situation almost identical to the current year. FAPRI's baseline estimates offer similar supply/demand projections.

Early estimates for average 2006-07 wheat prices are about $3.30 to $3.40. Recent new crop futures prices have been much higher than this with Chicago July 2006 wheat futures ranging from about $3.60 to near $4.00 per bushel and Kansas City July futures prices well above $4.00. Typical pre-harvest sales advice in previous years is to sell rallies that are based on production concerns. With recent rains improving SRW wheat prospects and prices above expected averages, selling rallies appears to be good advice again this year!