SUMMARY: A proxy demand curve can be developed from the WASDE reports and used to project prices for various yield and supply levels for the 2023-24 corn crop. The June WASDE projected the average farm price at $4.80 with a yield expectation of 181.5 Bu/ac. The proxy demand indicates that it would take a yield reduction to 174 to move the average farm price up to $5.50, 169 to get to $6.00, and 159 to get to $7.00. The key is what we just saw in 2022-23 and how far the drought will move that green supply line left.
Nearly every rural coffee shop and farmer meeting is a buzz with drought and price rumors for the 2023 corn crop. The common theme is that yield and production will decline significantly from USDA’s yield estimate of 181.5 B/ac and production of 5.265 BBu. Some estimates of no ending stocks to half a billion bushels, so it is no surprise that the price estimates range from $4 to $8-$10 or higher. Obviously there are significant implications for when to pull the price trigger and lock in prices.
Estimating prices is a bit outside the primary purpose of Selective Hedging LLC to build and evaluate logical technical models to trigger signals to place or lift hedges. But quantitative logic does provide some tools to reduce speculation and plucking numbers out of the air. In a simplified version, the equilibrium for supply and demand generates the average price estimate. While there are official and unofficial estimates for production and total supply, it is much harder to find estimates for demand. It only takes a few minutes to sketch out a crude proxy for a domestic demand curve because every price and disappearance pair in the WASDE report theoretically represents equilibrium points on a demand curve where supply intersected demand.
The attached graphic has two of those points and provides a proxy for estimating MY2023-24 average farm price if the yield or production numbers are changed. The vertical black dotted line near the left side of the graph is the total supply estimate (15.1 BBu.) for the 2022-23 crop on the June WASDE and intersects the red proxy demand at an estimated average farm price of $6.38. The vertical green line near the right side of the graph is the total supply estimate (16.7 BBu.) for the 2023-24 crop on the June WASDE and intersects the red proxy demand at an estimated average farm price of $4.80. Just like that you have the structure for a more theoretically correct projection of price if the projected supply shifts on future reports or your personal effort to out guess the market.
Today the market was trading CZ23 at around $6.00 and an average year would have a minus 30 to 50 cent basis yielding an average farm price estimate of $5.50-$5.70 at harvest. First, let me point out that domestic demand curves are quite stable because the core factors of population, per capita income, etc. move very slowly unless there is direct government intervention in total disappearance such as export restrictions. Dropping vertical lines down from $6.00, for example, associates that price with 15.5-15.6 BBu. and an average yield of around 169 Bu/ac. To get to the $7.00 area would need the total supply to be cut back about 2.0 BBu. to the 14.5-14.7 BBu. area with a yield of around 160.
Why is this inconsistent with the folks who are looking for $8-$10? Two main reasons. The price may spike to $8 or more, but the graph is estimating average farm price weighted by volume and not the highest price during the MY. The second reason is that the talk about running out of stocks rides on projecting the quantity demanded at $4.80 at the same levels when prices have risen to $6 or $7. Prices do ration demand in real time.
Posted by Keith D. Rogers, 20 June 2023
