Too many farmers overemphasize the importance of forecasts. What’s more important is to recognize underlying trends and selling opportunities as they occur.
Farmers who spend a lot of time listening to forecasts, reading about forecasts, and hoping for bullish forecasts might be better off redirecting their time to learning what underlying tendencies are at play for any given market.
With that in mind, let’s dive into fundamental analysis, the study of supply and demand.
A fundamental analyst is a little bit like an accountant, but their balance sheet columns are supply and demand. The bottom line of this balance sheet is the projected "carryover" or “ending stocks” when the marketing year is over. This bottom line may help predict price trends. If ending stocks are expected to be low, prices may be expected to be stronger than if ending stocks are expected to build. Green peas in the summer of 2024 exemplify this transition from high prices/low stocks to lower prices/higher stocks.
The supply-demand sheet can also help the analyst determine whether current prices accurately reflect the fundamental market conditions. If supplies are likely to build, yet today’s prices are unusually high, there is a significant risk of lower prices ahead. The reverse is also true.
Before arriving at a forecast for ending stocks, the analyst assesses supply. This includes production, imports, and what’s left over from the previous year (carryin or beginning stocks). Together this forms the total supply for the marketing year.
As for the demand side, domestic usage is the amount consumed at home. Depending on the crop, this includes usage in processing, livestock feed use, seed held back for planting the next season and spillage. Add exports and you get total disappearance or total usage. What’s left is the carryover or ending stocks.
Supply-demand sheets are produced by analysts, often leveraging the work of government agencies, such as the USDA or Statistics Canada.
Why look at supply-demand
Supply-demand analysis is important because it illustrates if supplies are building or shrinking. It also demonstrates if demand is expected to improve or not. This is true both within a marketing year and across several years.
When government agencies release reports containing supply-demand sheets, traders are watching. Big moves up and down can occur. Accuracy aside, supply-demand updates affect prices!
The USDA reports are important not only for US and Canadian markets. Many markets outside this continent are also affected by this supply/demand information. For this reason, the USDA is the nerve centre of agricultural market statistics.
Summer crop reports
In the summer, the biggest item in a supply-demand sheet is production. Traders and farmers sometimes become very excited about summer crop estimates. They don’t always agree, but they know government agencies have the best tools available for assessing crop size. So, a surprise in the summer crop estimates can cause huge price moves.
It's a big world out there
While the supply-demand reports for Canada and the US would seem to have the most relevance to Canadians, world supply-demand sheets deserve more than passing attention.
After all, the world is increasingly integrated. The Canadian or US supply and demand situation may indicate something different than the total world picture. In 2024-25, for example, some analyst reports discussed this discrepancy in the wheat market, where North American supplies appeared ample, but the world supply was tightening.
But wait, there’s more
The term fundamental analysis refers to anything related to factors that affect supplies and usage. These include things such as:
- Weather
- Political developments and decisions
- Global trade issues, such as border closures, trade restrictions, export permits, subsidies
- Currency exchange rates
- Buying patterns among users at home and abroad
We could go on, with an almost endless list.
Don’t rely on fundamental analysis alone
With many factors in play at a given time, adding up all the bullish factors and bearish factors to come up with a conclusion on where prices might go can be extremely time-consuming.
So, why bother with fundamental analysis at all? It is a useful tool to set basic parameters for market trends. Alone it will not indicate precisely when or where prices will go, or when or at what specific price to sell a crop, but it provides a valuable framework for further market analysis.
As a farmer, aim for a basic understanding of fundamental analysis, but balance this with being a good time manager. To clarify your thinking and accelerate your decision-making, getting a second opinion on fundamental analysis from a trusted source can help.
