Kub's Den

Tuesday morning's monthly World Agricultural Supply and Demand Estimates from USDA -- and their reception by the market -- were an altogether quieter matter than the Prospective Plantings report issued at the end of last month. The April report is always somewhat of a "lame duck," making proclamations about old-crop inventories and usage categories a month before the May numbers give a voice to the 2018-19 crop year. Nevertheless, a report on the existing supply and demand for all the major crops is important, and it helps to take traders out of the echo chamber, which recently has been repeating the same cries of tariffs / trade-war / RFS, focusing on just the two major row crops. A broader look at all the other crops though, clarifies which ones face overwhelmingly bearish supplies, and which crops might be in a position to rally amid bullish concerns.

Really the only way to compare one commodity's supply-and-demand story to another's is to use each one's stocks-to-use ratio. This is true even for comparisons made between grain markets. Hearing there will be 33.3 million hundredweight of total rice ending stocks in the 2017-18 marketing year, on its own, is no more meaningful to a market analyst than hearing there will be 2.18 billion bushels (bb) of corn inventory remaining at the end of August. Those stocks numbers are made more meaningful once they're given the greater context of how much of each grain is expected to be used during the marketing year. Remaining corn inventories over 2 bb could, in theory, be considered bullishly tight, if the market was using up 25 bb of corn each year. Alas, it's not.

The stocks-to-use ratio for each crop isn't explicitly given by the USDA's team of economists in each monthly report. Rather, it's a figure that must be extrapolated from each supply-and-demand table. It's not difficult to do: just divide the ending stocks projection by the total use projection. It doesn't matter what unit of measurement was used for each projection -- it could be million bushels, metric tons, pounds, short tons, or million 480-pound bales -- just as long as both the stocks projection and the usage projection were both given in the same units. The resulting calculation is unitless, and thus, comparable between any one market and the next. A fluid commodity, such as soybean oil, can even be compared to a fluffy commodity, like cotton or hay. Effectively, the stocks-to-use ratio tells us what percentage of a market's capacity either isn't needed by any willing end user, or will end up in-transit somewhere along the supply chain at the moment when one marketing year switches over to the next. A stocks-to-total-supply ratio would directly tell us the proportion of the market that could be considered 'excess' production (in wheat, for instance, that would be over a quarter of all worldwide wheat fields), but the stocks-to-use ratio is the standard benchmark used by the market, and it brings in the demand part of "supply and demand."

Comparing these ratios between one market and another is tricky, however. They are unitless percentages, and that allows me to say: the projected stocks-to-use ratio for U.S. sugar at 14.7% is smaller than the projected stocks-to-use ratio for cotton at 28.9%. But the supply chains of any two markets may be more or less comfortable with storing inventory. Keeping 5.3 million cotton bales in warehouses at the end of the marketing year may not be a struggle for the industry, and 1.9 million short tons of sugar ending stocks may be right in line with historical supply levels, even amid record-high domestic production.

For the big three crops included in the monthly report -- corn, soybeans and wheat -- we already know the score: a corn stocks-to-use ratio at a more-than-comfortable 14.8% (ending stocks were bumped up 2.6% since last month), a soybean stocks-to-use ratio at 13.2% (ending stocks projection only slightly decreased), and a U.S. total wheat stocks-to-use ratio at an eye-watering 52.9% (ending stocks were bumped up 2.9% since the March report).

Or do we really understand these scenarios as well as we should? That soybean figure on its own fails to reflect the relatively scarce soybean meal scenario. Ending stocks in the current marketing year are projected at only 300,000 short tons, or a 0.6% stocks-to-use ratio. However, for context, the market has seen inventory levels even a little lower than that in recent years, and this industry is accustomed to not storing large quantities in the supply chain, which is generally fine as long as there are no transportation disruptions.

Similarly, wheat supply and demand, if analyzed class by class, is not necessarily so bearish as the aggregate figure suggests. Frequently, we don't worry too much if one class of wheat has slightly tighter inventories than another, because flour millers and animal feeders can make some substitutions between one class and another. This year, however, the old-crop supplies for white wheat, spring wheat and durum are noticeably tighter than the supplies for hard red winter and soft red winter wheat. Animal feeders can switch between SRW and HRW, and the market can, to some extent, pad out durum flour supplies with spring wheat flour. But there is effectively no substitution effect between SRW and durum, and very little substitution effect between SRW and spring wheat. White wheat is a special creature all to itself. So it really is possible to get bullish about lower spring wheat and durum plantings, coming after a marketing year with relatively tighter supplies of those specific varieties, with those specialized markets the 'excess' winter wheat inventory can't enter -- even in a world with otherwise gigantic 'total' wheat stocks-to-use ratios. This is why it's worthwhile to investigate these old-crop estimates with a fine-toothed comb.

Here's a full table of the stocks-to-use ratios extrapolated from the latest World Agricultural Supply and Demand Estimates, including all those 'other' crops that aren't corn, soybeans or wheat:

Sorghum -- 7.8%
Barley -- 33.7%
Oats -- 13.3%
Long-Grain Rice -- 12.0%
Medium & Short-Grain Rice -- 18.9%
U.S. Sugar -- 14.7%
Cotton -- 28.9%
Corn -- 14.8%
Soybeans -- 13.2%
Soybean Meal -- 0.6%
Soybean Oil -- 8.6%
Total Wheat -- 52.9%
Hard Red Winter Wheat -- 68.0%
Hard Red Spring Wheat -- 37.7%
Soft Red Winter Wheat -- 75.3%
White Wheat -- 21.7%
Durum -- 36.9%

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

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