The bottom-line supply and demand number is stocks-to-use (s/u). I’ve long said stocks-to-use is the Readers’ Digest version of supply and demand, in that this 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%. Recently I’ve switched to the month end calculation of the DTN National Corn and Soybean Price Indexes based on a longer track record. I’m still working on getting the back data for wheat. By using the end of month number rather than a marketing year average, it gives us a picture of the stocks-to-use situation at the end of each month, a system that should smooth out the wide changes seen at the end of a marketing year. It also puts a spotlight on what I call the Marketing Year Misdirection, meaning supply and demand is a constant flow rather than a hard line drawn between old-crop and new-crop. This continues to be a work in progress, with the bottom line being stocks-to-use remain bullish for all three markets.
WHEAT: I’m still using the Barchart National Wheat Price Indexes (weighted national average cash prices). At the end of August the average wheat index price came in at $9.22, correlating to an available stocks-to-use calculation of 14.8%. This compares to the end of July $9.82 and 12.5%. Similar to last month, the less bullish readings are due to harvest, both the conclusion of US winter wheat and beginning of US spring wheat. This put more bushels in the pipeline, decreased the price and increased available stocks-to-use. This is a seasonal move, with last marketing year the outlier due to poor spring wheat production. While I still think the 2022 spring crop is going to be short, it’s looking better than its predecessor. The other factor is demand, with the US not seeing the expected uptick. In fact, August saw ships leaving Black Sea ports for the first time since Russia’s invasion back in February.
CORN: The DTN National Corn Price Index (NCI, unweighted national average cash price) was calculated at $7.11 on August 31, 2022. This correlates to an end of month available stocks-to-use of 8.1% The end of July showed $7.00 and 8.3% with last August coming in at $5.69 and 10.0%. There are a number of interesting things to talk about with the attached corn available stocks-to-use chart, starting with the Benjamin Franklin Fish Similarity (Like guests and fish, markets begin to smell after three months of moving against the trend). US available stocks-to-use increased for three consecutive months, based on lower monthly calculations of the NCI, before showing a decrease again during August. Seasonally I’m still looking for December corn to peak in mid-October, and with basis staying strong the NCI should be able to post higher monthly closes in September and October as well. But that’s where things could get interesting as the long-term trend of both markets (cash and Dec futures) remains down. If the NCI comes under pressure late in the fall it would be a reflection of better corn being harvested across the eastern Corn Belt. For now, supplies are tight and demand remains strong.
SOYBEANS: The DTN National Soybean Price Index (NSI, unweighted national average cash price) was calculated at $14.57 on August 31, 2022. This correlated to an available stocks-to-use calculation of 4.2%. The end of July had the NSI at $15.38 and 3.5% while the previous August saw the NSI come in at $12.68 and 7.7%. It should be noted we may also be seeing a Benjamin Franklin Fish Similarity building in US soybeans with the NSI decreasing for three consecutive months, raising the available stocks-to-use from 2.4% at the end of May to 4.2% at the end of August. Did the US find more soybeans over Q4 of the 2021-2022 marketing year? No. Instead there was a seasonal slowdown in demand, heightened this year from the lack of available supplies. If we want to compare marketing years, the $14.57 and 4.2% were the second highest and highest on record, trailing only the $17.32 and 2.0% from 2011-2012.
[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.