Too many farmers overemphasize the importance of forecasts. What’s more important is to recognize underlying trends and selling opportunities as they occur.
Farmers who spend a lot of time listening to forecasts, reading about forecasts, and hoping for bullish forecasts might be better off redirecting their time to learning what underlying tendencies are at play for any given market.
With that in mind, let’s dive into fundamental analysis, the study of supply and demand.
A fundamental analyst is a little bit like an accountant, but their balance sheet columns are supply and demand. The bottom line of this balance sheet is the projected "carryover" or “ending stocks” when the marketing year is over. This bottom line may help predict price trends. If ending stocks are expected to be low, prices may be expected to be stronger than if ending stocks are expected to build. Green peas in the summer of 2024 exemplify this transition from high prices/low stocks to lower prices/higher stocks.
The supply-demand sheet can also help the analyst determine whether current prices accurately reflect the fundamental market conditions. If supplies are likely to build, yet today’s prices are unusually high, there is a significant risk of lower prices ahead. The reverse is also true.
Before arriving at a forecast for ending stocks, the analyst assesses supply. This includes production, imports, and what’s left over from the previous year (carryin or beginning stocks). Together this forms the total supply for the marketing year.
As for the demand side, domestic usage is the amount consumed at home. Depending on the crop, this includes usage in processing, livestock feed use, seed held back for planting the next season and spillage. Add exports and you get total disappearance or total usage. What’s left is the carryover or ending stocks.
Supply-demand sheets are produced by the analysts at GrainFox, often leveraging the work of government agencies, such as the USDA or Statistics Canada.
Why look at supply-demand
Supply-demand analysis is important because it illustrates if supplies are building or shrinking. It also demonstrates if demand is expected to improve or not. This is true both within a marketing year and across several years.
When government agencies release reports containing supply-demand sheets, traders are watching. Big moves up and down can occur. Accuracy aside, supply-demand updates affect prices!
The USDA reports are important not only for US and Canadian markets. Many markets outside this continent are also affected by this supply/demand information. For this reason, the USDA is the nerve centre of agricultural market statistics.
Click here to see more...