My Grain Marketing Manifesto: Either ‘Enough’ or ‘Not Enough’

A couple of years ago, I wrote a column in this space that offered the advice: “When in doubt, sell some grain.” That could be my motto or manifesto — the one phrase I would repeat to anyone seeking guidance about when to market their crops amid frustrating, uncertain prices.

Today I have another pithy soundbite I’ve affirmed over years of analyzing those markets, one that distills every overcomplicated chart and subtle demand factor down into a simple framework. I now tell anyone interested in a grain market outlook that all they need to know in a given crop year is: “Will there be enough? Or not enough?” I can end the outlook right there, because, with that one question I feel like I’ve said all there is to say about the grain markets.

This framework of “enough, or not enough” captures something I’ve noticed over the past 17 years of conducting quantitative analysis of the grain markets — there are going to be long stretches of time when not really much happens, and then there are going to be pockets of time when very many things happen indeed.

The long stretches when nothing happens are possible because there is “enough” stuff in the market’s pipeline. If the end users of a commodity are confident they can always get their hands on what they want, they see no reason to panic and pay wild prices. The sellers of the commodity acknowledge they won’t get crazy prices for their stuff and must instead store it away until it’s needed. During a period of “enough,” it would take a lot more than a little inconvenient weather at planting time to bump the markets very far out of their comfortable, sedate, well-worn trading ranges.

The panicky pockets of time occur when there isn’t “enough” stuff in the pipeline, and end users’ demand must be rationed by higher prices. The market explores higher and higher bids to sort out who really needs the stuff and how much they’re willing to pay.

In academic theory, the difference between a period of “enough” or “not enough” can be explained by a concept called convenience yield. It means, basically, end users may pay a premium to have a commodity now instead of in the future, but only if they want it urgently enough now — if it’s more “convenient” to have possession of the stuff now because they are worried about the market running out of the stuff in the future. In agricultural commodity markets, a positive convenience yield means the calendar spreads are inverted — the nearby futures contracts are worth more than the deferred futures contracts.

Consider the case of cocoa futures in May 2024, when cocoa processors legitimately worry that recent crop failures mean there will not be enough cocoa in the world to meet demand. The July 2024 cocoa futures contract is worth almost $9,000 per metric ton (it would be awfully convenient to own physical cocoa right now) but contracts in 2025 are worth $6,500 and down from there. The more typical state for an agricultural commodity market is to have carry spreads — future months’ prices higher than the spot price — and a so-called negative convenience yield, because end users aren’t panicked and it’s actually more convenient for them if you pay to keep your commodity in storage and off the market for a while longer, thank you very much. Consider the case of corn futures in May 2024, when this year’s growing crop of corn is trading for a price of $4.85 per bushel in the December 2024 futures market, but if a farmer stores it away and doesn’t bring it to market until March 2025, the market will pay $5.00 per bushel.

The trick is to figure out — What is “enough?” What is “not enough?” There is a rule of thumb I learned when I started writing for DTN all those years ago, passed down to me by Gary Wilhelmi, DTN’s longtime Man on the Floor of the Chicago Board of Trade. The magic number is a 10% stocks-to-use ratio. If a grain market is projected to have more than 10% of its annual usage left over as ending stocks in the supply-and-demand tables, then the market will feel comfortable about having enough of the stuff. If the stocks-to-use ratio gets tighter than 10%, that’s when the end users start to get twitchy. And this has largely held true, in my experience.

In May of 2021, the corn market was adjusting away from its comfort zone, going from a 14% stocks-to-use ratio in the 2019/20 marketing year down to an 8% stocks-to-use ratio in the old crop 2020/21 marketing year and looking forward to no better than a 10% stocks-to-use ratio in the new crop marketing year. Today, according to the latest projections in USDA’s May World Supply and Demand Estimates, we are back in the comfortable world of having a 14% stocks-to-use ratio projected for both old crop and new crop corn, and a greater-than-10% stocks-to-use ratio even for new-crop soybeans, which are generally pretty comfortable with relatively tighter inventories. Gary would say we have “enough” of the stuff.

What does this mean for grain marketing? In conditions of scarcity (“not enough” or smaller-than-10% stocks-to-use ratio), it may be appropriate to expect volatility in prices, and it may therefore be appropriate to be somewhat aggressive in setting price goals or delaying sales. But in conditions of abundance (“enough” or larger-than-10% stocks-to-use ratio), there should be no expectation of wildly favorable prices during the marketing year, and the markets will reward those who act early, with discipline, at the seasonal timeframes (like roughly-speaking, now) when grain futures prices tend to have a mild risk premium compared to what may be available at harvest. Basically, if you can figure out whether the market will have “enough” or “not enough” in any given marketing year, you can figure out what you need to do and how urgently you need to do it.

Abundance, surplus, increase, overflow, plenty — these are words we traditionally associate with gratitude, because they mean we can live tranquil lives of peaceful, satisfied prosperity here in the middle of the greatest country the earth has ever seen. When we see the grain markets provide enough abundance to feed the world, when we know our customers and our customers’ customers will be satisfied and confident about the year ahead, these are good things. But they are also signposts for what to expect in the markets, potentially for years to come.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of “Mastering the Grain Markets: How Profits Are Really Made” and can be reached at analysis@elainekub.com or on social platform X @elainekub.