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Veteran Advisor

Well, Well, Well, Lookee Here

This topic is being discussed right now in the forum's. But, it certainly is one that can be hotly debated. Do ending stocks move markets or do moving markets move ending stocks? Here's a study that addresses that issue. I'd love to hear what all of you think of this. Personally, I'm a little skeptical to think that stocks don't play a bigger part in the market psychology. I don'ty think they are a "primary determinant" as the study summary indicates. But, certainly a bigger player in the market than given credit for. Well, here you go. Take a look at this press release:

 

A new report from GROWMARK Research challenges the commonly accepted notion that ending stocks are a primary determinant of agricultural commodity prices, according to a GROWMARK press release Tuesday.

“Stocks and the Stocks-to-Use Ratio: Are they meaningful for price determination?” shows that stocks are inversely correlated with prices, but that the correlation occurs within a limited price range, meaning that stocks do not dictate the extent of the price moves. “Stocks do not influence overall price levels,” according to Kel Kelly, GROWMARK economic and market research manager, and author of the report. Additionally, he shows, the correlation is often a reversed one: changes in prices cause changes in stocks.

The study indicates that fear of running out of stocks is likely based more on perceptions than on reality, as there is not much evidence that the marketplace takes strong action to compensate for missing supply in years of low production. Great efforts are made to show how overall price levels, as well as price volatility, are largely driven not by the fundamentals, but by the quantity of money spent in commodity markets, which in turn are dictated by commercial operators and (mainly) investors accessing additional spending power from the central bank.

Again, I ask. What is your opinion of this study and what it found?

 

Mike

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Senior Contributor

Re: Well, Well, Well, Lookee Here

I find the study about right, because the U.S. has not run out of stocks of grain.  Should the U.S. ever run out of soybeans, corn, or wheat, ending stocks numbers will become much more important.  

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Honored Advisor

Re: Well, Well, Well, Lookee Here

The ending stocks themselves do not influence the markets......It's the predictions of the ending stocks that do. 

FWIW, it is a moving target and pretty dang hard to hit accurately.......especially when they are using predicted numbers and not factual numbers.

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Advisor

Re: Well, Well, Well, Lookee Here

Kelloggs must be running the special where you get a PhD in Economics with 3 box tops and a self addressed stamped envelope.

 

Lots of issues there, conflated like a pretzel. Yes, liquidity preference influences commodity prices. Yes, price often leads the release of stocks numbers because that's what market do- there are hundreds of analysts who got nothing better to do than try to anticipate what USDA will say, and even though a lot of them will be wrong they tend to get the general drift.

 

I have no doubt whatsoever that USDA numbers are survey and stat based.  Wouldn't argue that sometimes they get it wrong and wouldn't even argue that maybe sometimes they don't put in a little temporaty windage to make things balance (as I've said many times, sometimes to your advantage, sometimes not, and why you shouldn't play report roulette even if you're sure you're right).

 

But if anybody is mad because there isn't some magic matrix they can plug numbers (which they apparently believe are 100% correct)  into and predetermine a price they need to get over it. That isn't how it works.

 

 

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Veteran Contributor

Re: Well, Well, Well, Lookee Here

I feel there is a good correlation to price and how it affects ending stocks when combined with the end user profitability and retail prices.  A good example of this was in July and August of 2013 when it looked like corn ending stocks were going to come in at under 700 million bushel (661 was the estimate with 821 the final).  End users were paying close to or record high prices to buy grain - some basis bids were $1.00 or more above normal in IA at that time - correct Ray J. ? They were paying these prices to either keep their supply chain running (holding back costs of shutting a plant down only to have to re-start it) and/or they were still able to make some money even with nearly $8.00 corn - at that time.

 

If this type of situation was not the case, end users would have not pushed their basis in order to procure what stocks were left and yes some did back off and we ended up with added stocks which is what USDA showed in going from 661 to 821 on corn carryout 9-1-2013.  We will always have some ending stocks of a commodity even if it is owned by an end user for future needs and not available for others to buy without a huge premium. 

 

High raw material prices can cut demand which will increase stocks of a commodity.  A large supply of available for sale commodities will cause end users to lower their bids until they find the place at which the commodity is no longer available from those that own it.

 

My feeling is that overall prices by those using the commodity to generate a finished product is the greatest influence to prices farmers receive.  I do believe that the higher than normal basis in locations such as IA in 2013 show that some end users of corn were still purchasing grain while others stopped due to the high purchase prices and thus ending stocks grew.

 

Just my thoughts.

 

 

 

 

 

 

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Senior Advisor

Aligns well with my understanding.

The wheat market explosion ogf 2007-8 was a perfect example. The trend of lowering stocks was clear. Acres headed down. The market psychology was tiopped toward JIT delivery (as if that solves the supply issue) and that the 'market' had a clairvoyance that individuals didn't. If the market needed a signal to raise production to avoid supply risk then it would magically be issued by the collective market. It didn't for wheat. What me worry. Even then the market didn't explode until very late in the game and well after the numbers were in and the problems were known. Way late. The 2010 Russian drought had some parallels.

 

And that's why I call the market a lagging indicator of the reality of a situation. The market was counter to the obvious physical trends.

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Senior Advisor

Re: Well, Well, Well, Lookee Here

I don't know that ending stocks mean alot. Grain buyers aka commercials are very astute about calculating their needs and their supply and what they need for future needs.

 

I don't know at what point they start buying new crop but they got months if not longer to accumulate supply to satisfy their needs. Currently they have about a 40 cent basis on new corn and 60 cent basis on new beans. I don't know how much they buy by default just because it is harvest. But there no need to push their bid until it looks like they might be short of supply. We soddies are sitting out here with crop to sell or projected crop to sell and they can just wait until we come to terms. Or if we don't they may offer a bit more.

 

Where most of us look at the marketing year as a few months after harvest, they are looking at a buying year of 18 months or longer. Perhaps ayear ahead or a 10 months after harvest. They got alot of time to do their buying and know what they need for financing their inventory or carry.

 

Not that they are engaged in anything unethical but they do have the wisdom to use time to there advantage.

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Veteran Advisor

Re: Well, Well, Well, Lookee Here

i agree with all the points here.

 

They have wisdom alright, aka huge conglomerates =  plenty of cash reserves.

 

say Mike,

anyone got evenin' duty on these dirty mouthed, X-rated spam site suckers???

 

thanks.

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Senior Contributor

Re: Well, Well, Well, Lookee Here

I agree with Hardnox. Statistics are a lot like French Bikinis. They reveal a lot, but also tend to hide the most important parts.

Just sayin...
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Senior Advisor

Re: Well, Well, Well, Lookee Here

One of the fathers of modern statistics was R. A. Fisher, who studied crop test plot data and genetic variation. He was essentially an extension agent at times, though much more than that.

 

http://en.wikipedia.org/wiki/Ronald_Fisher

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