The bottom-line supply and demand number is stocks-to-use (s/u). I’ve long said stocks-to-use are the Readers’ Digest version of supply and demand, in that one number can tell us the bullishness, bearishness, or neutrality of a market’s fundamentals. I’ve also argued endlessly over the years with economists, my point being there should be a strong positive correlation between stocks-to-use and cash price. Given this premise, I’ve developed my system between the two for all three major markets (wheat, corn, and soybeans) with the r-squared[I]for all three near 100%. In all cases I’m using the cmdty National Cash Price Indexes (weighted national average cash prices from Barchart), and in wheat that means HRW, SRW, and HRS have been weighted to reflect US production of all wheat supplies. The Darin Newsom Analysis, Inc. (DNAI) stocks-to-use numbers are calculated at the end of every month, and then compared to the previous month and the previous year. The DNAI numbers may not agree with subsequent USDA report estimates, but that is understandable given the DNAI numbers are real (based on national average cash prices) rather than imaginary (based on…I have no idea).
WHEAT: The 2021-2022 combined daily average cash price for the three major wheat markets was $7.54 at the end of January, correlating to a s/u figure of 23.0%. The end of December showed s/u of 23.6% and the previous January 42.7%. As has been the case since August 2020, the all wheat s/u station continues to tighten with the average cash price increasing for the 17th consecutive month (see second chart on website). It’s interesting to note while long-term fundamentals remain bullish, the long-term technical picture is more bearish. Here we see the clash between Newsom’s Market Rule #1 (Don’t get crossways with the trend) and Rule #6 (Fundamentals win in the end).
CORN: The 2021-2022 daily average of the NCPI though the end of January was calculated at $5.52, another solid 10.0-cent increase from the December average of $5.42. This put my end of January s/u calculation at 9.2% as compared to last month’s 9.4% and last December’s calculation of 11.6%. It’s interesting to note with the first month of 2021-2022 Q2 in the books available corn s/u has now fallen below the 9.6% calculation at the end of 2021-2022 (see third chart on website). As the end of Q2 comes in sight at the end of February, market fundamentals have grown more bullish, as indicated by both the March-May and May-July futures spreads moving to an inverse during January.
SOYBEANS: The 2021-2022 daily average of the NSPI though the end of January was calculated at $12.49, correlating to an end of month available s/u of 0.2%. This is a decrease from last month’s s/u calculation of 0.3% tied to the average cash price of $12.23 (see fourth chart on website). There has been little improvement in the US s/u situation since it first dropped to 0.4% at the end of April 2021, with a year end of January figure of 0.9%. The bottom line is available US supplies continue to tighten in relation to demand, with crush still running strong and exports holding firm.
[i] R-squared is defined as “a statistical measure of fit that indicates how much variation of a dependent variable is explained by the independent variable in a regression model.” (Investopedia). In my world, it is how closely related two (or more) variables are, in this case national average cash price and stocks-to-use.