I teach a course called “Commodity Marketing” at the University of Minnesota. A few weeks ago I gave my class an exercise on the balance sheet for grains. The assignment asked them to crunch the numbers on different supply and demand scenarios for the next crop year. Imagine my surprise when a simple exercise, designed to enlighten students, instead enlightened me with a bearish outlook for corn in 2014. Let me explain.
Commodity analysts put a lot of energy into projecting the balance sheet. Monthly WASDE reports from USDA provide a baseline for the industry and then the debate begins. Everybody has an opinion! Comments come forth like “yields will be higher than USDA estimates” or “export projections need to be raised” and “feed demand is too high,” etc. All of this debate and analysis is put forth to shed light on one number; ending stocks. If ending stocks are building, we know that supply is growing more (or declining less) than demand and the stage is set for lower prices. On the other hand, if ending stocks are decreasing, we know that demand is growing more than the supply and higher prices are likely. The inverse relationship between changes in ending stocks and changes in prices is one that holds true for all commodities (see graph).
Now, about that exercise. I asked students to look ahead to the balance sheet for corn in the 2014-2015 crop year. I gave them bits and pieces of supply and demand information for three different scenarios; most likely, bullish and bearish. Their assignment was to develop projected balance sheets under each scenario.
For the most likely scenario, I gave them planted acres estimated at 96.0 million acres (1.4 ma less than 2013), and a trend-line yield of 163 bushels per acre, food, seed and industrial usage at 6.4 billion bushels (and ethanol use of 5.0 bb). I had exports at 1.8 billion bushels, with a modest decline in bushels used for feed.
Except for the modest decline in bushels fed, I thought these figures looked realistic and reasonable. My students crunched the numbers and projected a doubling of corn ending stocks, to nearly 3.5 billion bushels at the end of the 2014 crop year. Ouch.
For the bullish scenario, I tried to put a spark in the price outlook. I decreased planted acres to 94 million acres, nearly 3.5 million acres less than 2013. I pared yields back another 2 bushels per acre. On the demand side, I held food and industrial usage at 6.4 billion bushels while cranking up exports and feed to 2.0 and 5.3 billion bushels, respectively.
After completing the assignment, a student asked if the exercise was meant to be a trick question. “I don’t do trick questions,” I said. “Why do you ask?” “Because,” he said, “in your bullish scenario, ending stocks are still projected to rise by 250 million bushels.”
Rising stocks, lower prices - I guess I should have crunched the numbers myself before giving it to the students. I won’t depress you with the bearish scenario.