4/1/07 (Bloomberg) -- Soybeans fell for a second day in Chicago, after ending 2006 on a 16-month high, on speculation demand to make diesel fuel from oilseeds will decline.

The price of a gallon of soybean-based biodiesel in Marshall, Minnesota, yesterday rose to the highest since October and was $1.35 more expensive than a gallon of low-sulfur diesel fuel. Biodiesel made from oilseeds such as soybeans and cottonseed or from animal lard qualifies for a $1 per gallon U.S. government subsidy when mixed with petroleum-based fuels.

``Prices are above where biodiesel will work in fuel mixes that are not mandated by the government,'' said Steve Nicholson, an economist for Doane Agricultural Services Co. in St. Louis. ``The biodiesel demand story may not be as robust as people once expected.''

Soybeans for March delivery fell 6.5 cents, or 1 percent, to $6.755 a bushel on the Chicago Board of Trade, the lowest close since Dec. 22. Futures, which have fallen 3.8 percent the first two sessions of 2007, rose 14 percent last year on speculation 10-year highs in wheat and corn prices would reduce global plantings of the oilseed.

There are 88 plants in the U.S. that produced an estimated 250 million gallons of biodiesel in 2006, triple the 75 million gallons produced in 2005, according to the National Biodiesel Board in Jefferson City, Missouri.

Global use of vegetable oils in fuel will rise 17 percent in 2007 to 21.6 million tons from 2006 and more than double the 8.7 million tons used six years ago, the USDA predicted last month. That's almost equal to the entire food use of vegetable oil in China, the biggest consumer.

South American Crops

Prices also fell on forecasts rains and cooler temperatures will maintain favorable growing conditions for crops in Brazil and Argentina, the two biggest producers of soybeans after the U.S.

As much as 1.5 inches of rain have fallen in parts of Brazil since yesterday, following storms that dropped up to 4 inches on both countries over the past week, according to Meteorlogix LLC in Lexington, Massachusetts.

``You have a good crop developing in South America that will increase global supplies'' when harvesting begins later this month, Nicholson said.

Price declines in both corn and soybeans accelerated at the end of the trading session after both markets attempted to rally earlier when March futures fell below support at the 50-day moving average, Hunt said.

``We rallied prices at the end of the year on speculation investors will buy more grain futures at the start of the new year and when that didn't happen it become a rush to get out'' the past two days, Hunt said. ``The liquidation of record speculative positions could cause more panic selling.''

Soybeans, used to make feed, vegetable oil and diesel fuel, are the second-largest U.S. crop, valued at $16.9 billion in 2005, behind corn at $21 billion, government figures show.

A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date.