Markets exist when supply and demand intersect. Somebody has ‘stuff’ that they are willing to sell at a certain price, and someone else wants to buy it at a certain price. When the two sides’ price expectations align, a transaction takes place and a market is made.
In grain markets, much of the attention focuses on the supply side, particularly during the growing season. It’s typically the more active side of the balance sheet as supply varies more from one year to the next due to swings in seeded area and weather. All of the action takes place within a few short and exciting months of the year. Not to mention, supply is also tangible – it’s the actual grain you can touch, feel and count.
Demand can be a little harder to wrap your head around. It’s the removal from the pile, something that tends to happen steadily and undramatically over the course of the year. While certain parts of demand are carefully counted (e.g., exports), other sources are much harder to measure (e.g., livestock feeding, spoilage). Often it can only be tallied at the end of the season when we look at the supply that we started with and then see what’s left when the calendar turns over to the new crop year.
The more plodding nature of demand means that it usually takes a backseat to supply in the summer news flow. However, that’s not the case this year as trade disputes are dominating headlines. For grain markets, the spat between the U.S. and China is the most prominent. Soybean futures prices were crushed on the expectation of ‘lost’ demand as U.S. exports are projected to decline sharply in the face of Chinese trade tariffs.
But, will the world see less demand for the grain complex? China has been actively purchasing soybeans from non-U.S. sources, primarily from Brazil, although Canada has played a small part as well. As Brazil gets tapped out of supply, this could open up export opportunities for the U.S. to fill holes that they otherwise might not have participated in. The result may be more one of shifting trade flows rather than a huge chunk of ‘lost’ demand.
Lower prices also help to encourage additional demand. As the cost of soybeans, corn, and wheat have dropped, end users are being enticed to use more. It’s possible that some of the feared demand ‘loss’ in headline export numbers gets offset quietly around the margins as cheap valuations result in more being used across the entire spectrum.
The difficulty in gauging demand at a moment in time in the same way that you can with supply makes it harder to analyze, particularly during times of uncertainty. This also means that the market may end up underestimating demand over a period of time. That doesn’t ensure that grain prices will inevitably go higher, but don’t be surprised if we look back eight months from now and find that there was more grain consumed than what is assumed today.