Supply and demand charts can give you some useful insight into future crop prices. Learn how to read them
Beside day-to-day commodity prices, there are other types of information that you should pay attention to. Some of these are supply and demand, carry forward stocks and stocks to use ratio.
Supply and demand charts
Supply and demand charts (S&Ds) are kept for every commodity imaginable by many different groups and organizations around the world — government, corporate or private individuals.
The S&Ds that are most commonly referenced when talking about North American grain markets are the United States Department of Agriculture (USDA) or Statistics Canada reports that come out at regular intervals through out the year.
S&D charts show how much grain analysts expect to be produced and consumed year over year, and how much will be left over at the end of the year to carry forward into the next year. This information helps the grain trade to establish a fair market price for each grain based on supply versus demand.
The information found in these reports is very useful to buyers, sellers and speculators. It gives them an idea as to what the supply of a particular grain is or will be based on assumptions and the use of historical data such as yields.
The numbers in these charts are at best a calculated guess. They are based on past years’ numbers, phoning polls conducted with farmers, actual field tours and various other methods.
Although these numbers are not 100 per cent accurate they have been compiled, tracked and monitored for enough years that the grain trade takes them as factual. These numbers can and will change market sentiment and influence futures markets.
S&D reports: Timing
S&D reports come out at various times throughout the year, so analysts’ predictions can be as accurate as possible based on ever-changing data. Prior to seeding they are predicting seeded acreage and yields, based on historical data and surveys.
After seeding, acres can be predicted more accurately, but weather situations throughout the growing season will impact acres harvested and yields.
After harvest a more accurate number for yields and production can be determined. This may have changed dramatically from early estimates due to harvest issues such as drought, too much rain or high levels of disease infestation.
Adjustments and accuracy
Sometimes historical numbers, such as last year’s seeded acres or yield, are adjusted in new reports. These changes can have a real impact on the current situation.
Any adjustment will impact the carry forward stocks — changing the total supply and projected end stocks for the current year.
Sometimes, changes can be significant. All of a sudden total supplies for the coming year are tight, and prices start to rise because of this adjustment.
Some speculate that these changes are made at times when markets are either too high or too low, and analysts are trying to bring markets back to a more normal pricing range by adjusting old numbers, which are very hard to substantiate or dispute one way or the other.
Quite often you will see adjustments to S&D charts for grains grown in other countries around the world well after the fact. Information gathered in some countries is not nearly as reliable or accurate as the information gathered for our local S&Ds. Often analysts will rely on information from an outside government source to estimate stocks on hand, seeded acres or expected yields. Any of these numbers may be guarded and adjusted to meet other countries’ own marketing needs.
If a country is a major importer (buyer) of grains, they won’t the world to know they are short on their grain production as it will push prices higher, making their grain purchases more expensive. Visa versa for exporting (selling) countries.
There is speculation as to the accuracy of foreign countries S&Ds. This speculation is also present within the North American grain industry when it comes to USDA and StatsCan reports, because of these same market pressures.
As I said earlier these reports are taken to be factual, but not necessarily accurate! Everyone in the grain industry has an opinion on S&Ds.
Carry forward stocks, is a simple math equation of total stocks less total demand for a balance left over (end stocks). These “end stocks” are then carried forward into the next years S&Ds and become part of the total stocks for that year.
Watching the end stocks from year to year will help you to see if stocks are building up year over year or are falling, which could have a real impact on price going forward.
Stocks to use
The “stocks to use ratio” tells you what percentage end stocks are in relation to total demand.
For example in the pea chart, ending stocks at the end of 2010-11 are 257 tonnes, and total demand for 2010-11 is 3,450 tonnes. Divide 257 by 3,450 and you get a stocks to use ratio of 7.34 per cent.
That tells you that there is less than one month’s supply of peas available in the market to meet next year’s demand, assuming the demand stays constant during the year. (If demand was constant during the year, 8.33 per cent of the total demand would be consumed each month.)
If there is any kind of a production glitch in the coming year, there may not be enough peas to meet demand. This would be considered a “tight” stocks to use ratio — it should help to keep prices high in an effort to ration demand and stretch out the life of the available supply until new crop production is available for sale and consumption.
I hope this helps you to better understand S&Ds. †