SDSU 2006 Commodity Price Outlook

South Dakota State University’s 2006 Commodity Price Outlook is available online. SDSU Extension Area Marketing Specialist Al May says the 45-page document is another tool for producers to use as they consider marketing decisions heading into planting.  The document covers corn, soybeans, wheat, hay, cattle, hogs, and dairy, with additional sections covering crop input costs and cattle managerial cost-saving tips.

Find the document online at http://econ.sdstate.edu.  Using the pulldown bar under “Extension,” click on “Current Market Analysis.” Then click on any of the six SDSU commodity market review pages there. The link to the 2006 Commodity Price Outlook is at the top of each one.  Or go to http://econ.sdstate.edu/Extension/EMC926.pdf. 

“It’s written in the timeframe of very late January through early February. By the time we hit May, June, July, obviously a lot of different things can change in the market,” May says.

Following are SDSU’s outlook highlights for wheat, corn, and soybean fundamentals.

2006 Wheat Outlook
Due to the current supply situation, it is probable that spring wheat prices will remain in the $3.50 to $4.00 range at least through the first quarter of 2006. Winter wheat prices in the state will likely settle in the $3.00 to $3.50 range during the same time frame. Current estimates of winter wheat acres planted in the U.S. for the 2006 crop year stand at 41.4 million acres, up 2% from a year ago.  Although acreage numbers are higher for 2006, the wheat trade does not seem to consider this particularly noteworthy at least at the current time. Very dry conditions plague many areas of the southern plains and the trade seems more focused on the potential for reduced production than the small growth in planted acreage.

Another factor that has played a role in the price strength in late 2005 and early 2006 has been the quality of wheat in the U.S.  Scab has led to significant yield losses and perhaps more importantly, led to premiums for high quality wheat versus severe discounts for scabby wheat. While it is too early to tell the extent of another scab problem in wheat this coming year, this is one factor that may easily create pricing opportunities for those with high quality, high protein wheat in 2006.

All these factors in addition to planting expectations of other classes of wheat in the U.S. will likely play a role in price direction; however, these factors will only play a role in terms of the impact on carryover supplies of wheat in both the U.S. and worldwide. It is important to remember that while the U.S. is one of several large wheat producers in the world, the U.S. crop in 2006 will not be the only factor that will impact the price levels of wheat in the U.S. and worldwide. Production in other countries will play a key role in price levels and it is highly likely that prices for wheat will be especially sensitive to growing conditions in the U.S., Canada, and Australia. Production problems in China would also lead to the potential for greater wheat exports to that country. The United States, Canada and Australia would all compete vigorously for that market.

Prices will also be sensitive to expectations for world consumption in 2006. Since world consumption for wheat has consistently trended upward for years, the wheat trade will still watch this category with interest to see if consumption continues to grow into the next marketing year.  If world consumption can again outpace world production as it did from 2000 through 2003, this would mean a return to declining world carryover stocks that would, in turn, give support to wheat prices. However, if world production outpaces world consumption this coming year, prices will potentially be pressured to levels in the low $3.00 range.

Exports will also play a key role in pressuring or supporting prices. U.S. wheat is always faced with the challenge of competing with other exporting countries for the export market. The U.S. will continue to face aggressive competition for a share of the export market from Canada and Australia in 2006-07. Exports will have to be at least as strong, or greater, this coming year as the estimates for 2005 to maintain current prices. A downturn in exports combined with a greater production level in the U.S. will undoubtedly drive U.S. stocks higher and put pressure on domestic wheat prices.

In summary, U.S. and world carryover supplies of wheat will be instrumental in determining what may be the longer term trend for wheat prices. If wheat carryover supplies move higher during the 2006-07 marketing year, spring wheat prices will likely fall below the current price levels of early January 2006 ($3.40 - $4.00). However, if a combination of production and demand factors leads to another decline in U.S. and world carryover supplies of wheat, area prices would most likely stay at least at levels of $3.40 to $4.00 or greater depending upon the amount of decline in carryover wheat supplies.

This year will undoubtedly bring opportunities and challenges to producers in pricing their wheat. It is important to evaluate production costs and to create a marketing plan in order to capture cost of production and profit. It will be important to evaluate forward pricing strategies that will lock in a floor price with a hedge, a cash forward contract, or with a put option. In addition, this year may offer opportunities to take advantage of rising prices after a floor price has been locked in either through a futures hedge or a cash forward contract. This could be accomplished by purchasing at the money or out of the money call options. This strategy is often referred to as a synthetic put. Option premiums will likely be an issue that determines the purchase of at-the-money or out-of-the money options.

2006 Soybean Outlook
Demand for soybeans worldwide has shown consistent growth over the last 20 years, and it is likely this trend will continue in 2006. At the same time, the expansion of soybean production in South America shows little sign of slowing. Although Asian rust is still a relatively new problem in South America, control methods combined with acreage growth in that region has led to continued growth in total production of soybeans. The impact on production will become clear only when the South American harvest is completed in the spring of 2006.

The potential infection of soybean rust in the United States this coming year may also be a factor for production but only if there is widespread infection that is not sufficiently controlled.  It would seem likely that farmers, as they did in 2005, let factors other than soybean rust influence their planting decisions for 2006. As a result, the primary factors of current supply and demand should still be viewed as those having the most influence on this market at least for the first quarter of 2006.

With current supplies of soybeans at record-setting levels in both the U.S. and worldwide, and with U.S. exports currently lagging significantly behind the pace expected, there is a strong likelihood that area soybean prices will remain pressured at levels around $4.80 to $5.40 or lower well into the spring and early summer of 2006. It will be important to watch for USDA’s Prospective Plantings report at the end of March of 2006 and the final Acreage report issued in June of 2006 to determine actual planted acres of soybeans this coming year. If U.S. plantings and projected production for 2006 appear to closely match production from 2005, it is likely that soybean prices will be pressured enough to fall below the $5.00 level and to possibly fall to levels below loan rate levels prior to, or at harvest of 2006.

If production, however, does fall from 2005 levels, the decline may be sufficient only to provide modest strength in price due to the large carryover supply situation in the U.S. and worldwide. It will take a much greater decline in production in 2006 than that experienced in 2003 to have a significant upward impact on prices in 2006 and into the first quarter of 2007. It is probable that if trend-line yields occur in 2006, the current supply of soybeans will grow and be sufficient to hold prices from moving above the current $4.75 to $5.30 range.

This year will undoubtedly bring opportunities and challenges to producers in the pricing of new crop soybeans. It is important to evaluate production costs and to create a marketing plan in order to capture cost of production and profit. Because of the relative bearish outlook for 2006, it will be important to evaluate forward pricing strategies that will lock in a floor price with a hedge, a cash forward contract, or a put option. These strategies will protect against any price decline after the pricing strategy is employed.

There are strategies to employ to take advantage of rising prices after a price has been established. This could be accomplished by purchasing at the money or out of the money call options. Option premiums will likely be an issue that determines the purchase of at-the-money or out-of-the money options. With any of these strategies, it will still be important to know the county loan rate value for soybeans in the event that soybean prices fall so that any of the above-mentioned combinations do not establish a floor price for soybeans that is lower than loan rate.

2006 Corn Outlook
There is no question that the record crops of the last two years and the corresponding growth in carryout corn stocks will translate into continued pressure on corn prices through the first and likely, the second quarter of 2006. At the same time, there seems to be little reason to question the current demand structure for corn; one that points to continued growth in the U.S. domestic market and abroad.

The real question that arises is the usual one; what will production look like for the coming year?  Will U.S. farmers plant more acres to corn or fewer acres to corn? At this point, there is some thought that farmers will plant fewer acres of corn due to higher input costs; particularly fertilizer. Some analysts have already estimated between 1 to 2 million fewer acres of corn will be planted in 2006 compared to 2005. This, in turn, would potentially lead to more soybean acres in the United States in 2006. However, there is no question that ethanol production will continue to grow when one considers the on-going concerns of consumers with respect to rising gasoline prices and the need for more environmentally sound fuels.

While it might make sense that fewer corn acres will be planted in the more marginal corn growing areas of the western corn belt due to higher fertilizer prices, it is still too early to tell just how much of an impact this factor will have on planted corn acreage in 2006. In addition, some farmers may have had corn on the same ground for a number of years already and the need for rotating those acres could lead to a reduction in total planted acres of corn in 2006.

Ultimately, the question comes down simply to the yield potential for the 2006 crop. Should U.S. production in 2006 match the extraordinary production of 2004 or match the crop of 2005, there is little question that corn prices by harvest time will settle below loan rate levels making LDPs, market loans, and counter-cyclical payments the norm. Even though demand is still considered strong, a corn crop in 2006 that matches the 2005 crop will result, at best, in retaining or slightly shrinking the current carryout supply of 2.4 billion bushels. This likely will result in longer term weakness in corn prices, perhaps well into 2007. However, if production in 2006 falls back under 11 billion bushels, demand may be in a position to likely outpace production again, leading to the beginning of a reversal of the growth in carryover supplies of corn, giving corn prices the ability to move a bit higher. Each year, production sets the tone and 2006 will be no exception.

The first indicator of potential 2006 production will come in the form of USDA’s Prospective Plantings report that will be released at the end of March. If U.S. farmers indicate they might plant additional acres of corn in 2006, this will very likely pressure old and new crop corn prices well into the planting season and through June of 2006 when the final Acreage report is issued by USDA.

The next obvious factor will be the growing conditions during the summer of 2006 and the expectations during that time of the size of the national corn crop. If production estimates are on track to match the 2005 crop, prices will very likely be pressured below the $2.00 level and below loan rate levels even if usage levels continue to grow for U.S. corn. Demand growth in the U.S. and worldwide will likely not be strong enough to support current price levels if the U.S. produces a corn crop in 2006 that is equal to, or larger, than the 2005 crop. If demand, for whatever reason, begins to shrink during 2006, then production levels would need to drop significantly in 2006 to maintain current price levels. On the other hand, if production in the U.S. slips back to the 10 to 11 billion bushel level or lower in 2006, and demand continues to remain strong, cash corn prices will likely rise to levels above the $2.00 mark or greater.

This year will undoubtedly bring opportunities and challenges to producers in the pricing of their corn. It is important to evaluate production costs and to create a marketing plan in order to capture cost of production and profit. Due to the possibility of another very large corn crop in 2006, it will be important to evaluate forward pricing strategies that will lock in a floor price with a hedge, a cash forward contract, or a put option. These strategies will protect against any price decline after the pricing strategy is employed.

There are strategies to employ to take advantage of rising prices after a price has been established. This could be accomplished by purchasing at-the-money or out of the money call options. Option premiums will likely be an issue that determines the purchase of at-the-money or out-of-the money options. With any of these strategies, it will still be important to know the county loan rate value for corn so that any of the above-mentioned combinations do not establish a floor price for corn that is lower than loan rate.

Grain market graphics courtesy George Flaskerud, NDSU. See more information online: www.ag.ndsu.nodak.edu/aginfo/cropmkt/cropmkt.htm