According to United States Department of Agriculture (USDA) projections of a popular statistic known as the stock-to-use ratio, commodity prices should continue to trend down.
The stock-to-use ratio is a measure of balance between supply and demand. It is the level of carry-over stock for a given commodity as a per cent of the total use. Total use can be impacted by feed, human consumption and exports. As total use increases, it lowers the stock-to-use ratio.
The stock-to-use ratio is also often translated into the number of days of supply available in the marketplace. The higher is the ratio, the more supply there is available, conversely, a lower ratio indicates a tighter supply situation.
The USDA forecasts both domestic and world production for major crop types including corn, soybeans, and wheat. World stock-to-use ratios are expected to increase for corn, wheat and soybeans driven by increased production.
In 2014-15, corn yields are expected to be slightly higher than last year, but with only a small reduction in total planted areas, the stock-to-use ratio is expected to climb to 15.8%.
The USDA projects both an increase in soybean acres and yields. Yields are projected to be 4% higher than 2013-14, resulting in a record crop pushing the U.S. stock-to-use ratio to 8.3%. Nearly double last year’s levels.
So what do these higher stock-to -use ratios suggest for prices?
Higher stock-to-use ratios imply lower prices The USDA estimates corn prices to decline below US$4.00 per bushel in 2014-15 and remain there for several years. By comparison, the futures markets suggest a price of around US$4.60 per bushel for the December 2014 contract. The outlook for corn ultimately impacts the outlook for wheat and barley crops. The outlook for soybeans impacts the outlook for canola.
Regardless of the forecast, margins are expected to tighten given farm input costs are not expected to decline significantly. This will force producers across North America to focus on their cost of production and seek efficiencies within their operation.
As we all know, a lot can change between now and when we market our crops. Another bumper crop, drought or unexpected swings in demand or exports can move prices.
- Craig Klemmer, Portfolio Analyst and Agricultural Economist