Posted by: usset001 | February 2, 2011

The Balance Sheet Part III: Ending Stocks

Debating the relative importance of supply vs. demand is fruitless, particularly when we see that there is one number in the balance sheet that tells all about the relationship of grain supply to demand: ending stocks.

Ending stocks (often called carryover) are critical in fundamental and balance sheet analysis.


ending stocks = total supply – total demand

While the absolute level of ending stocks is important, analysts are generally more concerned with the changes in ending stocks from one year to the next, because there is an inverse relationship between changes in the level of ending stocks to changes in prices. If ending stocks are increasing, supply has outrun demand for the year in question, usually resulting in lower prices. Conversely, a decrease in ending stocks indicates higher total demand relative to supply and pressure for higher prices.

Look at the record of this inverse relationship. Over the past 60 years in corn, all but 11 years showed an inverse relationship between changes in ending stocks and prices (I’m looking at the national average prices computed by the USDA). In wheat and soybeans – both commodities are less obedient than corn and, I might argue, more influenced by world markets – the inverse relationship holds in nearly 3 of 4 years.

Ending stocks are best considered as a percent of total use (demand), or as weeks of usage remaining at the end of a crop year. An example illustrates the point. Consider the current crop year projection (2010-11) and a crop year from 40 years ago – 1970-71. In both cases the ending stocks of corn will be about 745 million bushels. This is a very large pile of corn. At the end of the 1970-71 crop year, 745 million bushels represented about 17% of total demand and a carryover into the next year of nearly 9 weeks worth of corn. At the end of the 2010-11 crop year, 745 million bushels will represent less than 6% of usage and less than 3 weeks of carryover – the second tightest corn carryout since 1950 (only 1995-96 was tighter).

You can see how comparing stocks to the base of demand creates a statistic that is more useful and relevant for comparisons over time. We know that ending stocks of corn, relative to the demand base, is slated to be the second tightest on record. The carryout in soybeans is projected to be the tightest in the last 45 years.

Tight ending stocks in both corn and soybeans go a long way towards explaining the strength of the current bull market.


  1. Prof. Usset,

    Thanks for putting the carryout in context with respect to current versus historic usage. Interesting to see that similar carryout previously could tide the world over for 9 weeks and now can only satisfy demand for 3 or less. Even without supply disruption, it seems like that is a situation where a destination market could go without for a period. How do end users account for an plan for that?

    Thanks for the insights.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s


%d bloggers like this: