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Margin for Error with the Crops is Tightening

Published on: 11:52AM May 28, 2009
The chart of the week is corn, soybean and wheat ending stocks per use ratios. Basically, an ending stocks per use ratio formula is; stocks leftover at the end of the business day on the last day of the crop year divided by how much we use in the crop year. So for example, if we have 10 bushels of corn leftover and we use 100 bushels for various outlets during the crop year, we would have a 10% ending stocks per use ratio. What you need to know looking at this chart is that the lower the ratio the tighter the stocks. As one can tell, corn and soybean stocks are projected to be relatively tight with the upcoming crop year (2009/10- for corn and soybean crops that are being planted now). And the major problem that buyers face when the trade is anticipating tight stocks is that the margin for error is small. And when the margin for error is small, the markets have a tendency to react more violently to supply challenging news. So corn and spring wheat planting delays in the US, a 27% drought reduced crop in Argentina (major soybean product exporter), and a rising crude oil market have influenced the grain markets sharply higher in recent weeks. The trade is generally working on ending stocks per use ratios (2009/10*** below) lower than the May USDA forecast (2009/10* below) meaning the margin for error has deteriorated in the last month. Thus the volatility in the grain markets may be sharp moving forward until all concerns for supply errors abate or prices rise enough to further ration demand. The wild card could be crude oil. The crude oil market has been technically strong as of late. But crude stocks are heavy and demand is waning. If the crude oil market was to break sharply lower, it should pull the grain markets downward as well.
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