Using trends to second guess the USDA

The first official USDA supply and demand forecast for the marketing season are produced each year in May.  The release often has a significant effect on the market – with subsequent monthly revisions as the trends are modified with the specific data for the year.   Changes are usually largest in the period from August to November when the bulk of the world's grain is harvetsed and tail off for the next 6 months of the marketing season.  We prepare trend forecasts in November for the marketing year post May of the following year.

At the most basic level there is a clear relationship between stocks and price: in each of the last 27 years a rise in stock levels resulted in a lower price, while a fall in stocks raised price.  This relationship is the equivalent of tossing a coin and calling the correct answer 27 times in a row: the probability of the two events not being related is about 0.000001%.  Quantifying the relationship is harder and the relationship between stocks and price, and stocks-to-use and price, changes (we cover this elsewhere in Inside Track). 

In 2009 we calculated that the chance of a return to the supply situation (and dollar prices) experienced in 2007/8 was remote, and this was subsequently shown to be the case, despite the worst climatic conditions in Russia for over 100 years.

However, not all global crop stocks are available for trade.  Consequently, it is useful to focus on the major exporting countries since available traded grain largely determines price.  China is the major wheat stockholder and has historically horded wheat rather than sell the surplus.  It has also shown the greatest variation in stocks between years (according to official data, Chinese wheat stocks have shown a sustained increase since 2006/7).  India is also a major stockholder but a small contributor to the world market.  Of the major stockholders that trade, the three most significant blocks are the USA, EU and FSU (Former Soviet Union) with Canada and Australia the next most significant. 

The yield variation from trend-line, based on harvested area yield (not planted area) may overstate the potential variation because the USDA data has potentially been adjusted (to some extent) to take into account current crop condition, particularly in the USA.  However, most yields appear to match the trend-lines (linear trends for most countries and a polynomial curve for the EU where yield increases have most noticeably tailed off). 

If any of the major exporting countries had a ‘typically’ bad year (but not exceptionally bad) in isolation, the stock-to-use ratio would fall at least 1 percentage point if exports were maintained.