After having fallen to bottom lows in April, prices of soybean, wheat and corn are now hitting multi-year highs and have since increased by 42.5%, 18.9% and 40.1% respectively. Are crops going to set a new high? We use “stocks/use ratio” to observe whether they can keep the momentum going.
What does “stocks/use ratio” represent?
Stocks/use ratio is a measure of days/years for which the remaining stocks can last, under the current supply/demand pattern. For instance, 23.4% suggests that the current stocks can provide for 85 days if demand remains level.
We use USDA’s projections of supply for the year as “use” (the denominator) and use ending stocks as “stocks” (the numerator), so our stocks/use ratio is an exclusive data on MacroMicro. It’s a high frequency indicator for crops’ fundamentals and a reliable gauge of supply and demand. What is “high frequency data”?
How does it relate to price?
The ratio and price show a negative correlation. When stocks/use ratio decreases, demand is getting stronger or supply is diminishing and price rises. When the ratio rises, demand is slowing or supply is increasing and price falls. Simply put, the lower the better!
As of November 2020, soybean stocks/use ratio, 23.45%, remains below its 10-year average and continues to decline. Demand for soybean is unprecedentedly high. However, wheat stocks/use ratio, 42.57%, has risen past its 10-year average, suggesting that wheat has been oversupplied. Corn stocks/use ratio, 25.12%, is also slightly higher than its 10-year average, but it’s decreasing, suggesting that demand for corn is improving.
In conclusion, soybean is the most robust among these three commodities, as of now, and its price still has momentum to climb higher.