- The post-USDA quarterly Grain Stocks report reaction by markets caused a great deal of consternation in the analysis/commentary industry.
- Most of the issue had to do with those saying something went wrong didn't take into accounts both sides of the supply and demand table, focusing instead on stocks only.
- The reality is we knew the relationship between supplies and demand had changed a great deal over the past year by standing the markets cash indexes, the intrinsic values of the various markets.
As I talked about numerous times during September, all eyes would be on the December 2023 corn futures contract (ZCZ23) heading into last Friday’s close. As fate would have it, the deciding factor was likely to be the September 1 quarterly Grain Stocks report and as it turned out, that’s generally what happened. Algorithms reacted to USDA’s number of 1.361 bb just bearish enough to drive Dec23 back below the August settlement of $4.7825, closing September at $4.7675. This erased the possible long-term bullish spike reversal on the continuous (Dec futures contract only) monthly chart, leaving the long-term trend down for another month.
I don’t spend much time on the X-site formerly known as Twitter, at least not the main page where everyone airs their grievances, but I saw enough last Friday afternoon to know there was a great deal of wailing and gnashing of teeth about how September 1, 2023 stocks of corn and soybeans were lower than what was reported for September 1, 2022, and all wheat stocks were basically unchanged from the previous year. While the general populace was raising a ruckus about stocks, they failed to consider the other half of Economics 101. It has become common for the majority of the analysis/commentary industry to focus on stocks only, forgetting completely about use.
To better understand the relationship between stocks and use that led to the September 1 grain stocks on hand number, we have to go back to the end of August 2023 table showing the national average cash prices on August 31, what it told us about available stocks-to-use (as/u), and how it compared to the end of August 2022. The cash corn index (ZCPAUS.CM) was down $2.29 for the year, raising as/u from 8.1% to 11.4%. The cash soybean index (ZSPAUS.CM) was down $1.11 for the year with as/u increasing from 4.3% to 5.9%. Though USDA is still guessing at 2022-2023 supply and demand, using its own September supply and demand numbers shows total use of US corn was estimated to have dropped 1.261 bb from the previous marketing year while soybeans decreased by 134 mb. It’s not rocket science to understand the intrinsic value of a market, its cash price, reflects supply AND demand so if the latter is dropping, a decrease in the former should not be considered bullish.
For example, let’s use USDA’s September supply and demand guesses. In corn, total use was pegged at 13.695 bb putting the ending stocks guess at 1.452 bb. The previous September total use was estimated to be 14.956 bb resulting in and ending stocks guess of 1.377 bb. It was a similar situation in soybeans with September 2023 showing total use of 4.330 bb and ending stocks at 250 mb as compared to 2022’s 4.464 bb total use and an ending stock estimate of 274 mb. Those of you of a certain age will remember when US corn stocks at a 1.0 bb was considered huge, but then demand changed, and that same 1.0 bb became a critically tight figure. For the record, since the Energy Policy Act of 2005 went into effect, starting the demand market in corn almost 20 years ago, USDA’s September 1 stocks on hand estimate has only been below 1.0 bb twice: 2012 and 2013.
You’ll notice I use the word “guess” frequently when discussing USDA’s method. That’s because it is what it is. To have a clearer picture of what real supply and demand is we have to use what I call the Unknown Variable Solution. While we don’t know what supplies actually are, in the US or around the world, and estimating demand is a crapshoot until all the receipts are counted years down the road, we have to solve for the all-important available stocks-to-use by working backward. To do this I start with the cash indexes, any day of any week of any month of any year. By plotting it on a logarithmic trendline (Thank you Excel) I can calculate as/u anytime I want. No, it is not an estimate of ending stocks-to-use, but a reading of as/u as of the day the cash index was calculated. That is an important difference, and one we saw play out in corn, soybeans, and wheat so far during 2023. My way of looking at fundamentals (cash price determining as/u) has an r-squared of nearly 100% for all five markets I track (for all you statisticians in the crowd), confirming my long-waged argument against ag economists who are content to use USDA’s imaginary numbers with no solid connection to the markets’ intrinsic value.
So to answer the question posed by the title of this piece, “What Went Wrong with the Grain Markets Last Friday?”, my answer is “Nothing”. The markets; corn, soybeans, and all the wheats, made perfect sense if we look at both sides of the supply and demand ledger rather than just one.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
