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Jordan Rizzuto is a proprietary trader covering the U.S. equities and global commodities markets. Jordan was previously Vice President of Storm Exchange, where he managed the company's analysis of weather’s impact on macro- and micro-economic trends, primarily for the agricultural commodity... More
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stormx.com/agriculture
  • Grain Prices: Looking into the Crystal Ball 0 comments
    May 19, 2009 04:56 PM | about stocks: MOO, DBA, JJG, CF, TRA, AGU, POT, MOS, MON, SYT, ADM, ANDE

     

    Market participants constantly search for leading indicators to assess longer-term price direction. The stocks-to-use ratio ["STUR"] can often provide that edge for the agriculture markets. The ratio is calculated as Ending Stocks / Total Consumption for the current marketing year. 
     
    Layman’s terms: the STUR tells us how much grain is left over at the end of the year (i.e. excess supply) after all consumption (i.e. demand), as a percentage of total demand. Thus the STUR gives us an excellent gauge for assessing just how tight current supplies are relative to demand.
     
    The key here is to monitor the direction and rate of change in the ratio. Knowing the nominal value alone, while helpful, simply gives us a static view of the current supply-demand balance. Here are the recent marketing year trends for the (DBA) agriculture ETF constituents, namely corn, soybeans, wheat and sugar:
     
     
    Source: USDA
     
    Economics 101 teaches us that prices should be inversely correlated to various measures of supply and demand. Does the relationship hold over time when we employ the STUR? Indeed it does. Here is an illustration of the year-over-year change in the STUR versus the year-over-year change in the average futures price (rolling front month) for U.S. corn:
     
    Sources: USDA, Bloomberg
     
    The relationship between the annual change in the STUR and the annual change in average price demonstrates an inverse correlation of -65.8% since the 1960/1961 marketing year. 
     
    The stocks-to-use ratio is a powerful tool for assessing longer-term grain market direction. Position traders will be well-served to follow this ratio closely as they judge the probability of price trend support over time.
     

    Disclosure: No positions

    Themes: Materials, Agriculture, Economy, ETFs, Commodities Stocks: MOO, DBA, JJG, CF, TRA, AGU, POT, MOS, MON, SYT, ADM, ANDE
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