The next crop year is just around the corner. As grain and oilseed producers iron out their marketing strategies, they are also bombarded with a wealth of information about markets. Some reports are just more important than others – such as the World Agricultural Supply and Demand Estimates report of the United States Department of Agriculture (USDA).
Just last week we learned 2015 U.S. corn acres were projected lower than initially thought along with an increase in yields; ethanol usage in 2015-16 was estimated higher, while feed use and export demand were revised downward. How are producers expected to make sense of all this information?
The simple answer: Use the stocks-to-use ratio.
Our commitment on the Ag Economist Team is to keep an eye on the stocks-to-use ratio for grains and oilseeds throughout the crop year. We prepared a video that explains the basics behind a stocks-to-use ratio. In short, it explains the balance between supply and demand: the higher the ratio, the more supply is available compared to the strength of demand. As such, downward prices would be expected to follow a downward trend. Conversely, a lower ratio indicates a tighter supply relative to total use, and prices would be expected to move upward.
Look at the chart below. The small squares provide the average U.S. corn price of a marketing year as a function of the stocks-to-use ratio at the end of that same marketing year. Corn prices were on average really high in 2012-13 when the ratio was around 7 percent. Quite a contrast to the 2014-15 marketing year: an average price of $US 3.70 with a stocks-to-use ratio of 12.9%.
The thick red line illustrates the negative relationship between prices and available stocks. As the projected end-of-year stocks get lower (and the stocks-to-use ratio is down), the price moves up towards the top left-hand corner of the chart.
Most of the corn futures contracts for delivery in the 2015-16 marketing year show a price higher than the average forecast price of the USDA. This suggests that market participants:
a) have lower expectations on average than the USDA for the size of the US corn crop; or
b) are anticipating a stronger demand for corn;
c) or both.
Expectations for the U.S. soybean crop were revised down last week, reducing the soybean stocks-to-use ratio. As a result, soybean prices immediately strengthened following the release of the USDA report. U.S. stocks of wheat were projected higher, but so was the overall use of wheat. The result was higher average U.S. prices forecasted for the 2015-16 year.
A sound marketing plan is critical for a successful grain and oilseed farming operation. Our commitment is to keep an eye on the stocks-to-use ratio for major commodities throughout the year and report back in this blog.
J.P. Gervais, Chief Agricultural Economist