Was U.S. Crop Production Up in 2024?

Was US Production Up or Down This Year?

In 1863, before I started watching markets, U.S. President Abraham Lincoln proclaimed the last Thursday of November to be a “Day of Thanksgiving.”

In his official proclamation, President Lincoln talked about a “civil war of unequaled magnitude and severity,” likely not envisioning a time when the country would again be divided nearly in half. Given the state of the Union (or Disunion), as I write this, it’s entirely possible the United States doesn’t make it to its next Thanksgiving. But let’s not go down that dark path – at least not yet.

President Lincoln opened his proclamation by intoning, “The year that is drawing toward its close has been filled with the blessings of fruitful fields and healthful skies."

As we look at the markets 161 years later, we can discuss whether prices are the result of those same fruitful fields due to healthful skies this past year. But how do we do that? Most in the industry will provide the (foolish) answer of the “USDA will provide us with everything we need to know about supply and demand.” I used to feel sorry for those folks, but the longer I do this the more I find their foolishness funny. As the late Charlie Munger said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

So, what would a “not stupid” way of looking at the 2024 U.S. corn and soybean crops be?

Though I’m not an economist and will repeat that statement proudly whenever and wherever it is necessary, like (most) everyone else I took Econ 101 and 102. In my case, it was decades ago back at Fort Hays State University. The one thing I’ve carried with me all these years is the basic concept that the equilibrium price (market price, intrinsic value of the market) is the price at which the quantity demanded equals the quantity supplied. It is determined by the intersection of the demand and supply curves. Therefore, if the equilibrium price is the intersection of supply and demand, then all we need to do to understand real fundamentals (all factors involved with supply and demand) is to study price.

But What Price?

The best price to use is a market’s cash value (intrinsic value). By staying away from the futures market, we avoid some of the issues that can skew prices, most notably futures spreads and noncommercial (fund, speculative, etc.) activity.

In some markets where cash values are harder to come by and national cash indexes don’t exist (as far as I’m aware), then I study the spot-month futures contract (e.g. markets in the energies sector). However, even that has its limits (I'm thinking of gold, where the market has several lesser used contracts). There is a cash index I track for gold, but I don’t know how it is calculated or where the cash data comes from, so I’m not convinced it acts as the intrinsic value of the market.

In the grains sector, I do have reliable national cash indexes that can be viewed as true intrinsic values of the various markets. Given this, all I have to study to understand the immediate supply and demand of the five major grain markets is their national cash indexes.

What do I mean by “study the national cash indexes?"

Trend

This is nothing more than price direction over time. If the national cash indexes are in a downtrend, then it means the equilibrium price of the market is being influenced by:

• More supply.
• Less demand.
• A combination of both.
• Seasonality.

Price Distribution

This is a study I developed to show how the current index relates to historic price levels. If the index is in the lower end of the range, then real supply and demand could be considered increasingly bearish. If the index is at the upper end of its range, then real supply and demand could be considered more bullish.

Available Stocks-to-Use

By using what I call the unknown variable solution I can calculate a market’s available stocks-to-use percentage at any time.

Available stocks-to-use is the relationship between available stocks and demand:

The higher the percentage, the more bearish fundamentals are.

The lower the percentage, the more bullish fundamentals are.

I use available stocks-to-use based on markets’ intrinsic value rather than the estimated ending stocks-to-use discussed by the rest of the industry based on faulty USDA estimates.

Unknown variable solution. By studying national cash indexes, I can calculate available stocks-to-use without knowing the unknowable variables of actual supply and demand numbers. This is an important distinction because we never actually know supply and demand numbers, regardless of what much of the industry tells you.

Recall the quote from Charlie Munger.

But what about the original premise of this piece? Did the U.S. see “fruitful fields due to healthful skies” during 2024?

Given all five major national cash indexes are at multi-year lows after extending long-term downtrends, indications are that U.S. production was indeed up this year. More importantly, it makes no difference what yield and/or production estimates are. That’s what so few in the industry understand. What matters is the overall relationship between supply and demand, or the equilibrium price.

As markets reach the latter stages of fall, I’m seeing indications that long-term trends are changing for the Indexes. It’s possible that a year from now I’ll be talking about long-term uptrends and real fundamentals that are less bearish.