Darrel Good Quotations

The persistence of moderate to severe drought conditions in parts of Illinois, Iowa, and much of the southern Plains increases concerns about yield potential. As usual, forecasts of summer weather conditions are not consistent at this time.

The production intentions of hog producers will be of particular interest. The report will reveal whether producers' modest expansion plans have changed as a result of an extended period of relatively low feed prices.

The price strength has been a little surprising given the magnitude of the surplus in U.S. corn inventories. However, over the past 32 years, the central Illinois cash price has never established a marketing year high in February, suggesting that even higher prices might be expected sometime over the next six months.

Similar to corn, USDA soybean production forecasts had the largest impact on soybean futures prices in August, with recent price reactions appearing somewhat larger than in the past.

Based on the relationship between the stocks-to-use ratio and price since 1998-99, a price of $2.51 implies a 2006-07 year-ending stocks-to-use ratio of 8.8 percent. In comparison, the current projection of the stocks-to-use ratio for the 2005-06 marketing year is 22.4 percent.

Fundamentally, the increase in exports and export sales has been a supportive factor. Ideas that ethanol-driven demand for corn will continue to increase at a brisk pace and that U.S. corn acreage may decline modestly in 2006 also provide fundamental support. Dry weather has driven wheat prices higher and has raised concerns about the 2006 growing season for corn and other crops. Speculative demand for corn and other crops has also escalated, as evidenced by the daily tally of the net position of the fund traders.

The range of $0.505 is at the low end of historical experience. New highs in the spot cash price are certainly possible, particularly if weather concerns persist into the spring.

Markets will continue to react to other factors, but these reports will provide updated fundamental information.

Most analysts are on record with expectations of a decline in corn planting intentions and an increase in intentions for soybeans. The debate generally centers on the magnitude of the changes. Acreage of spring-planted crops, however, could deviate from intentions due to escalating spring wheat prices; potential for abandoned hard red winter wheat acreage to be replanted to other crops; changes, if any, in price relationships of spring-planted crops; and spring weather conditions.

With the growing season coming to an end, most observers believe that the South American crop will be record large, with more uncertainty about the Argentine crop than the Brazilian crop. U.S. soybean oil stocks at the end of the most recent reporting month--January 2006--were estimated at 2.477 billion pounds, nearly 60 percent larger than stocks of a year ago. Stocks were at the highest level since August 2002.

Those intentions are widespread geographically, with the exception of Minnesota and North Dakota, where intentions are unchanged and up 240,000 acres, respectively.

There appeared to be no trend in the size or direction of forecast errors over the study period.

Based on current conditions, however, it appears that the soybean prices need to be at a level to discourage a large increase in U.S. acreage in 2006.

A stocks-to-use ration of 8.8 percent, then, means 2006-07 year-ending stocks of 1.047 billion bushels, implying a crop of 9.966 billion bushels. That is, the market appears to be trading a 2006 corn crop that is 1.146 billion bushels, or 10.3 percent, smaller than the 2005 crop. That calculation is obviously sensitive to the forecast of use. A smaller forecast of use implies a smaller crop and vice versa.

A trend yield near 150 bushels, then, would produce a 2006 crop of 10.92 billion bushels.

At this juncture, it appears that U.S. corn consumption and demand prospects are stronger than prospects for U.S. soybeans.

Current world production and demand prospects, however, seem to be relatively more favorable for corn than for soybeans.

Prices now appear to be settling into a trading range that may persist into the first of the calendar year.

South American soybean production prospects will be one of the more important market factors for the next three months.

That level of use is historically consistent and provides evidence that the size of the 2005 harvest has been accurately estimated.

The USDA may want to consider expanding the scope of the subjective yield surveys it uses in making the forecasts in order to incorporate a wider range of market and industry participants.

The USDA generates crop production forecasts based on estimates of planted and harvested acreage and two types of yield indications -- a farmer-reported survey and objective measurements.

This is contrary to the view that the markets are inefficient and provides substantial opportunities for farmers to gain additional profits through marketing.

However, if bird flu results in a permanent reduction in world poultry production, an increase in red meat production might eventually be required, resulting in increased feed consumption in the long term. Domestic demand prospects also remain strong due to increasing livestock production and expanding ethanol production. These developments should support increased corn consumption well beyond the 2005-06 marketing year.

The magnitude of the increase will have implications for the total area available to plant the spring-seeded crops such as corn and soybeans. The debate about how rising production costs will affect corn and soybean acreage decisions will continue into the spring of the year.

The June Grain Stocks report will provide the next opportunity to calculate the rate of domestic corn use. Whether or not these projections are changed in the upcoming report, the market appears to anticipate an eventual increase. Stocks of corn at the end of the current marketing year may be 100 to 125 million bushels less than the current forecast of 2.3 billion bushels.

The cut in the export projection was a bit larger than expected, but the Census Bureau export report for December, released on Feb. 10, indicated that exports are lagging last year's pace by even more than indicated by the USDA weekly export figures.

The forecasting comparisons for soybeans were somewhat sensitive to the measure of forecast accuracy considered. One measure showed that private market forecasts were more accurate than USDA forecasts for August regardless of the time period considered. Another measure showed just the opposite.

A minimum of 23 advisory programs were included in the analysis each year. A total of 41 programs were included for at least one year. The results for 1995-2003 were released in earlier reports, while results for the 2004 crop year are new.

The market will closely monitor planting progress, weather and weather forecasts, and weekly crop condition reports as they become available in order to judge 2006 production prospects. These factors will also provide producers with valuable information for gauging new crop pricing opportunities. The lesson of a year ago is that the weekly crop condition ratings are very valuable in judging U.S. average yield prospects.