Darrel Good's outlook column this week notes US soybean producers have at least three courses of action as concerns about the Brazilian soybean crop continue to impact the market. Good is a University of Illinois Extension marketing specialist.

1. Establish reasonable price targets for selling additional quantities of old and new crop soybeans. Those targets are difficult to establish given all the uncertainty surrounding price prospects. Price expectations should probably be tempered by the current large surplus of soybeans in the United States.

"Those stocks will provide some buffer for any shortfall in South American or US production in 2005," Good says.

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"There is still downside price risk. Limited damage to the South American crop and a favorable US growing season could result in lower prices by late summer, with considerable pressure on basis levels."

2. Producers should carefully select crop or revenue insurance coverage, recognizing that there may be additional production and price risk in 2005 and that base price levels for revenue products are much lower than last year.

3. Consider the prudent use of options as a way to manage the risk of large pre-harvest sales.

Like last year, this year's concerns about the Brazilian soybean crop have to do with late-season dry weather.

Good's column notes that in January 2004, USDA judged Brazilian soybean production at 2.205 billion bushels, above most forecasts from Brazilian agencies. That forecast increased to 2.24 billion bushels in February, but declined each month from March through June. The final estimate was for a crop of 1.933 billion bushels, nearly 14 percent smaller than the February forecast, Good reports.

"The large decline in the prospective size of the South American crop last year came on the heels of a very small crop in the United States in 2003 and contributed to high prices experienced last spring," he says.

USDA's January forecast for Brazil's 2005 crop, at 2.37 billion bushels, was slightly higher than the forecasts from most other sources, Good says, adding that the USDA forecast declined to 2.315 billion bushels earlier this month. That number is also higher than most other forecasts.

"Official forecasts from Brazil have been for a crop of about 2.24 billion bushels, still 16 percent larger than last year's harvest," Good says.

"Some private forecasts dropped sharply last week, with some talk of a crop as small as 2.02 billion bushels. For Argentina, the USDA has maintained a forecast of 1.433 billion bushels, about 15 percent larger than last year's harvest. Reports of crop conditions in Argentina continue to reveal prospects of a large crop."

The price impact of a shortfall in South American soybean production this year will be moderated by large supplies in the United States. Stocks of soybeans on Dec. 1, 2004 totaled 2.305 billion bushels, 616 million (36.5 percent) larger than inventories on Dec. 1, 2003.

"Importantly, 80 percent of the year-over-year increase was in on-farm stocks of soybeans," said Good. "As a result, the futures market has been inverted much of the year and the cash basis has been extremely strong in most markets. Both of these developments are contrary to expectations for the price structure during a period of large surpluses.

"The corn market price structure, with a generally weak basis and large carry in the futures market, is more typical. While a slow sales pace by producers has supported cash soybean prices, it appears that there may be large quantities to move off the farm before the 2005 harvest."

Good said the upside potential for a soybean price rally is also difficult to judge because prices did not previously decline to the extremely low levels expected from the large 2004 crop. The current price rally resulting from Brazilian crop concerns is exactly what should be expected if prices had already fully reflected the large surplus.

"However, if prices had not yet fully reflected the extent of the surplus, the response to crop concerns may be more muted," he said. "That is, confidence in a rally starting from $4.25 would be greater than a rally starting from $5."

Added to the mix is an expected decline in US soybean acreage for 2005. USDA projections show a gradual decline in US acreage over the coming years as planted acreage of crops increases. The Conservation Reserve Program is also expected to include expanded acreage over the years ahead.

"For 2005, the first look at possible acreage will come with the USDA's March 31 Prospective Plantings report," Good says. "In addition to potential changes in acreage, the soybean market will have to work through the annual unfolding of weather and crop conditions, including the potential of soybean rust."