Uncertainty surrounding South American soybean crop size and US production potential is apparently enough for now to offset the impact of current large supplies, says Darrel Good, a University of Illinois Extension marketing specialist.

"Additionally, US producers reportedly continue to be reluctant sellers, keeping basis levels strong," Good said in his weekly outlook column on Monday. "Soybean prices will likely become more volatile over the next several weeks as South American production prospects unfold.

Soybean prices have been under pressure in early February but increased sharply last week, despite USDA projections for even larger US and world stocks at the end of the current marketing year, Good notes.

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For South America, USDA reduced the projection of the current Brazilian crop by 55 million bushels (2.3%). South American soybean consumption is expected to be down by 75 million bushels and the projection of world soybean consumption during the current marketing year was reduced by almost 110 million bushels. The projection of year-ending world stocks increased by 20 million bushels, to a record 2.254 billion bushels, or 30% of projected use during the current marketing year.

"So why the increase in price of soybeans in the face of such large US and world supplies?" Good asks. "The answer seems to be that the large speculative traders decided to reduce their net short position in the futures market. But, that answer begs the question of why those traders wanted to give up some of those short positions.

"Fundamentally, there appear to be three reasons," Good says:

1. The continuation of strong Chinese demand for US soybeans.

2. The reduction in the Brazilian production forecast caused traders to take a fresh look at South American crop and weather conditions.

3. The prospect for a smaller soybean crop in the US in 2005.

As of February 3, USDA reported total US soybean export commitments for the current marketing year at 870 million bushels, 40 million more than on the same date last year, Good points out. For the year, USDA projects a 125 million-bushel increase in exports compared with last year.

"Given the collapse in exports during the last half of the 2003-04 marketing year - due to limited supplies - they project large year-over-year increase should be reached, or perhaps exceeded," says Good. "Total Chinese demand and China's decisions bout how many South American soybeans to purchase will be important. To date, China accounts for 42% of the US export business, compared to 36% at this time last year."

As for South American production, Good says market participants now seem to believe the crop has suffered more weather damage than previously indicated. The concern is the crop may even fall short of the revised USDA projection.