I came across an article this week talking about how with the recent extreme weather around the world and the escalation of the war in Ukraine, now is the time to speculate in grains. This coincides nicely with an uptick in interview requests from financial media groups outside of agriculture, wondering what is happening in the grain markets and where I think prices may head next.
There is no shortage of headlines when it comes to what is impacting market movement, and as a result, no shortage in volatility. It is honestly exhausting right now to stay on top of everything that is changing, even worse when with the addition of social media, many reports that may drive market movement need to be verified as the risk of false flags or inaccurate reporting is exceptionally high.
Buy headlines, sell newspapers, they say. At least I think they say, now that I have that in print I’m wondering if I made it up…
In any event, reading through the article, I would have to say it was a less than comprehensive explainer. That is no shot at the author by any means, as from the outside looking in, I’m sure grains look like a really great place to make some money and how hard could it be?
With the recent ranges, opportunities to cash in are plentiful, you just have to guess right.
However, if you guess wrong, they can painfully remind you not to mess around in areas you don’t belong. Or as Louis Winthorpe III said in the movie “Trading Places,” ‘One minute you’re up a half a million in soybeans, and the next, boom, your kids don’t go to college, and they’ve repossessed your Bentley.’
Because of this and the outside interest that is shifting back to grains, I figured what better time than now to give a quick introduction to the things that really matter when it comes to market movement. Of course, there are nuances, as in any other market, that can influence or change the weight of some of these factors. In the end though, they are the foundation needed to understand what is driving grain market action and whether the headlines that you are seeing indicate a long-term fundamental shift or are more of a short-term driver.
This in no way guarantees you will make money trading grains. Most anyone who has traded grains successfully or for any amount of time will tell you it is dangerous and to stay away, they will say there are better and easier ways to make money in this economy. But most of you likely don’t want to listen to that advice, so here’s a very basic introduction into the things you should be looking at if you want to speculate in the grain and soybean markets.
Stocks to Use Ratios
There are so many factors that influence supply and demand projections throughout the marketing year. We start the year with an *idea* of what *might* happen, with a better grasp of actuals as the year progresses. The ebbs and flows of supply and demand expectations and their influence on price can be murky at best sometimes, making the stocks to use ratio a valuable tool in recognizing the overall structure of a market.
To get the stocks to use ratio, you need to take the projected ending stocks of a crop and divide it by the projected demand. This will give you a percentage, or a gauge of tightness in the market. Looking at current stocks to use projections versus historical trends can give valuable insight into price direction.
When looking at corn, the current stocks to use ratio projected for the 23/24 crop year is 16%, this is much higher than the previous stretch of stocks to use, making the corn situation substantially different than the bean one, where current stocks to use remains historically low at 7%.
From an historical perspective for corn, at 16%, the current projected stocks to use ratio is higher even than the 18/19 crop year, when we finished with a 15.5% stocks to use ratio and a front month price that averaged just under $4.00. While the crop and its subsequent demand development in the year ahead is far from being written in ink, this stocks to use would be substantially higher than what’s been seen the last handful of years.
Soybeans stocks to use at 7% would indicate prices should stay around the range seen over the last several marketing years, as stocks to use is only slightly higher than the 6% seen each year since the 2020/21 crop year.
Stocks to use in wheat doesn’t provide the same insight in price direction in my opinion as it does in corn and beans. The different classes of wheat and different nuances in market structures in the physical market make it a point of reference, with the breakdown by class far more valuable but harder to pin down.
Seasonals
Each growing season has its own timeline, with the need for a risk premium and the amount that premium needs to be changing as unknowns become knowns. In the past, the US growing season had the greatest influence on seasonal price direction, but with the world now experiencing two major influxes of supply from both hemispheres, there are some arguments that the seasonal trend in prices is changing.
Understanding how the flow of grain can influence price is valuable. There are times during the year, or events that happen that can drive an increase in farmer sales, or an increase in end user pricing.
Learning the growing seasons, how they can influence grain flow and subsequently influence price action is an important step in understanding how stout a market move is and whether it should be bought or sold.
The USDA has some valuable resources on global production that can be found here.
The Areas That Matter
In line with using the link above to get a better feel for the seasonal aspect of grain flow around the world, use it to learn who the major players are when it comes to production. Get to know the important production areas in each country, their production season and how weather may influence potential yield or regional demand.
Understanding how these global powerhouses in production and demand interact with one another is key as well. For instance, recognizing that the phytosanitary agreement written between Brazil and China last year for corn was a game changer is key. This shift in trade has made historical Chinese import data from a supplier standpoint nearly obsolete as corn trade between the two countries is new and only likely to grow.
There have been several other major developments in global food trade since Covid and the war in Ukraine, making it key to understand who the major players are and how they may influence price movement.
USDA Reports
There is a lot of noise that can surround the release of USDA reports, depending on the report, the data released and how the market was positioned. There is a hierarchy of report importance in my opinion, with Quarterly Stocks at the top of the list. I’ve talked about quarterly stocks and why they’re valuable in the past, but I feel quarterly stocks provide us an opportunity to reconcile supply and demand projections throughout the crop year.
A big miss in quarterly stocks shows we have an imbalance somewhere in reality versus expectations.
Next on the list of important USDA reports are the monthly supply and demand updates, but it is important to remember not all supply and demand updates are the same.
The most important updates tend to come throughout the growing season, with the first look at what the World Ag Outlook Board is expecting in the year ahead released in May. Following the WAOB projections, NASS releases their first data derived yield estimate in August, with subsequent adjustments each month as more accurate production data is gathered. These production updates run into November, culminating with the January report that reconciles harvest data with the first quarterly stocks of the year.
Export sales and export inspections are next on my list to watch, with crop progress one of those things I watch, but value very little.
In the end, grains are something you can get into and make money in, many people before you have, and many will in the days, weeks and years ahead. However, if you intend to make this something you do for the long haul, you need to understand the core fundamentals of the crop you are trading, and hopefully this piece gives you a great starting point.
As always, don’t hesitate to reach out with any questions. I am here to help!
On the date of publication, Angie Setzer 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.
