Years ago, I was taught in grain marketing class that the function of price is to ration supply. If we have too much of something the function of price is to go low enough so we start using more (build demand). And if supplies are too tight, the function of price is to go high enough that supplies are rationed.

There has historically been a strong correlation between the final stocks-to-usage ratio (ending supplies divided by total usage) and the average price of corn and soybeans at the farm.

This methodology works best under free-market conditions. And as you might guess, price is influenced dramatically by government programs, particularly when prices go under loan rate or, as was the case in the old days, above release prices. Price forecasting is much simpler and easier to explain during periods when farm programs have little influence on direction.

The World Is Changing

I certainly don't want to imply that the world grain market has never had an impact on commodity prices in the U.S. What has changed dramatically in the last few years is the dislocation of grain supplies versus where the grain is needed. As the graphs show, the U.S. is definitely the world grain storage bin for corn. However, Brazil is now the leading storehouse for soybeans.

What's changing in the world of price forecasting is the issue of what is more important — worldwide supplies or domestic supplies? Case in point: Domestic supplies of soybeans in the U.S. have been extremely tight with an expected stocks-to-usage ratio this year of only 5%, the lowest in the last 30 years. On the other hand, the world stocks-to-usage ratio in soybeans is estimated to be 16.4%, which isn't tight at all. As recently as 1996-97, the world ratio was 10.7% and the year before it was 13.2%.

Conversely, world corn stocks are the tightest ever. This coming year's expected stocks-to-usage ratio is 13.1%. As recently as 1998-99, it was at 29.6%. In the mid-'80s the ratio was more than 40%. But domestically, stocks-to-usage ratios are not tight. Currently estimated to be about 14% for this coming year, it's not tight when compared to past bull markets in corn when the stocks-to-usage ratio dropped below 10%.

What's My Point?

Over the coming months you're going to hear arguments by soybean bulls wanting to know how this market can go down because of tight domestic supplies. You'll hear arguments from corn bulls on why this market should not go down with worldwide supplies the tightest in history.

It is, frankly, human nature that we argue in favor of the statistic that most closely supports the direction we want prices to go. I'd have to admit that price direction in both corn and beans has been more closely correlated to domestic supplies than worldwide. Accordingly, if production is good this growing season forget the tight worldwide supplies — this market is headed down.

In soybeans, the tightness has already been discounted in the price strength that occurred in mid-June. This market is now going to concentrate more on the worldwide environment.

Parting Thought

Price forecasting is nothing like it was even five years ago. The opening of worldwide markets can be both a plus and a minus for U.S. farmers as witnessed in this year's corn and soybean market. Something we can count on over the coming months — extreme price volatility. While not a popular opinion, unless major production problems occur by the beginning of August, prices at harvesttime in both corn and soybeans will be lower than they are today.

Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.