Understanding the importance of stocks-to-use ratios

Looking ahead to the United States Department of Agriculture’s World Agricultural Supply and Demand Estimates report for September, many traders will be eager to see if there will be any adjustments made to yield after the dramatic decline in yield that was forecast in the August report.

The September report will be watched by the world. After all, now there are six major agricultural commodities with tight ending stocks—corn, soybeans, wheat, oats, canola and cotton. On Sept. 10, initially traders will watch the yield numbers released by the USDA. Are they higher or lower than trade expectations, and by how much? Next traders will focus on total supply, and changes to demand, and how that equates to ending stocks.

Ending stocks is a way to quickly measure how much supply is left over or expected to be left over after any crop year. If the perception is that ending stocks are getting larger, then that usually leads to commodity prices falling lower. If the perception is that ending stocks are getting smaller, then that usually contributes to an increase in commodity prices. Taking the significance of ending stocks one step further is understanding the importance of the “stocks-to-use ratio.”

How to calculate the ending stocks to use percentage and its importance

When you compare both the ending stock, along with the stocks-to-use ratio against previous years, this percentage number is a fantastic indicator of whether current ending stock levels are at historically small amounts (and justification for higher prices) or plentiful amounts (often times when prices move lower).

To calculate the stocks-to-use ratio, take the ending stock number, and then divide that by the total demand usage number (provided on the USDA report), which can then be articulated as a percentage.

Currently the stocks-to-use ratio for old crop corn and soybeans is significantly tight, which justified the higher prices this spring and early summer. The current ending stocks for soybeans for the 2021-22 crop year is pegged at 155 million bushels, with a stocks-to-use ratio of 3.5%. Corn ending stocks for the 21-22 crop year is at 1.242 billion bushels, with a stocks-to-use ratio of 8.5%. All wheat ending stocks for the United States are currently placed at 627 million bushels, which is down substantially. However, the stocks-to-use ratio for all wheat is at a modest 30.5%.

The September report will be of utmost importance to know where new crop ending stocks will be, and how that correlates into stocks to use. This will set the tone for the rest of 2021. And also sets the stage for the “fight for acres” that will likely unfold for 2022.

When market scenario planning, it is essential to be aware of the possibilities that prices can work either higher or lower to be ready to capture opportunities and minimize price risks. By having a fundamental understanding of supplies, demand, ending stocks and the stocks-to-use ratio, it empowers you to be able to make better marketing decisions for the current marketing year and beyond. It also allows you to think outside the box at possibilities in the future. As you know, having the upper hand on possible price scenarios allows you to have more consistent marketing, thus keeping your farm on top.

Editor’s note: Naomi Blohm is a marketing advisor with Total Farm Marketing by Stewart-Marketing and she is a regular contributor to the Iowa PBS series “Market to Market.” She can be reached at [email protected].