- We can read real what a market has to say about its real supply and demand situation any time of the day, any day of the week, by looking at futures spreads.
- In the grain and oilseed sector we can run those spreads through the filter of full carry costs, taking into account storage and interest.
- When we add in basis, the difference between cash price and futures price, the fundamental picture becomes even clearer.
Ok class. It’s time to take out your notebooks as we once again talk Grain and Oilseed Fundamentals 101. I’m starting to feel like a burned-out teacher who has taught the same lesson for 30 years, most of it seemingly falling on preoccupied ears. But rather than earbuds playing whatever the latest music craze is during lessons, the noise I’m competing with is the same as it has always been: USDA, NASS, and Crop Tours. Frankly, it doesn’t matter how many times I teach this course the next comment is always, “Yeah, but did you see NASS’ latest weekly crop condition numbers?!” I’ve talked about the Browning Effect of those nonsensical numbers before, so there’s no point in debating it here. I’ve also mentioned some of the ulterior motives behind USDA’s monthly supply and demand tables, but again, they are taken as gospel by everyone but actual traders. As for crop tours, well, let’s just say I got a media company kicked out of those in the past and I’ll leave it there.
With all that being said, if you absolutely have to rely on completely made-up numbers to feel good about your understanding of supply and demand, you can skip this lecture. I’ll give you time to clear out.
Okay, I’m assuming at least one person stayed, though in this electronic universe I have no idea. I could be taking to a room full of crickets.
If you want to really understand grain and oilseed market fundamentals it is as simple as basis and futures spreads. I know I talk about the corn market a lot, in fact I could put a book together on all I’ve written about King Corn over the years, but a look at this market’s fundamental reads makes it easier to understand what I’m trying to say.
Starting with national average basis, my latest calculations came in at 34.75 cents over September futures (ZCU23) and 21.25 cents over December (ZCZ23). If we compare the first number to the previous 5-year average weekly close for this week of 16.5 cents under September, we see basis is 37.75 cents stronger than normal. Why? As I’ve said for a year or more, US corn supplies are lower than what most believe. When feed demand was running strong it kept my monthly available stocks-to-use figure tight. As feed demand has slowed, and export demand remains near nonexistent, my monthly available stocks-to-use figure has loosened but could still be viewed as historically tight.
Then we have futures spreads, with the September-December holding at a carry of 13.0 cents and covering roughly 39% calculated full commercial carry. That figure could be considered neutral-to-bullish, with my threshold drawn at 33% or less. So we know old-crop supplies are tight, but not uncomfortably so this late in the 2022-2023 marketing year. What about new-crop?
Since we know next to nothing about demand[i], we can assume most of what we see in our new-crop fundamental reads has to do with supplies. And with basis and the September-December futures spread showing old-crop stocks tight but not uncomfortable, the bulk of new-crop futures spreads is in regard to the commercial view of 2023 production. Here’s what has happened so far this summer:
- At the end of June the December-March spread covered 36% calculated full commercial carry.
- At the end of July the same spread covered 35.5% calculated full commercial carry, meaning the commercial side had shown increased concern during the month.
- At the close of trade on Tuesday, August 22 the same spread was covering 42% cfcc. This tells us the commercial side of the market had grown more comfortable with 2023 production.
What do I mean by all this? Full commercial carry is total storage and interest charges to hold bushels of grains (or oilseeds) in a commercial facility. This changes daily based on on the price of futures and interest rates. When we look at a futures spread and we see the market is willing to pay you more later (a carry in futures contracts), it tells us the market is PAYING US LESS NOW. Why? It doesn’t need the supplies to meet demand. The more of the total cost of storage and interest the market is willing to pay, or in other words the stronger the carry, the more bearish short-term fundamentals[ii].
We can also apply this to a long-term view of supply and demand if we look at a series of futures spreads for the marketing year, also known as a forward curve. In 2023-2024 corn the Dec-July24 futures spread closed Tuesday at a carry of 26.0 cents and covering 34% cfcc, again just outside the bullish threshold. This tells the long-term view of fundamentals is not bearish, but it also isn’t bullish.
Do I know what national average yield, production, and demand is going to be? No. But neither does anyone else, regardless of what they tell you. But we can read how the market views the situation as a whole (supply and demand), taking all the various factors into account. All we have to do is understand basis and futures spreads.
Again, I get the fact the majority of the industry will continue to squawk like blind, baby birds waiting for regurgitated sustenance from USDA and its subsidiaries (including PR firms). But the minority won’t, finding reality much more interesting.
[i] The most recent weekly export sales and shipments report showed the US had only 263 mb of new-crop sales of corn on the books.
[ii] In the Chicago SRW wheat market the September-December spread is covering nearly 100% calculated full commercial carry, an incredibly bearish supply and demand situation.
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.
