Grandmill worked with the concept of the "right price" quite extensively. Much akin to a super market shopper, grain traders need to know when the price of a grain represents a "bargain" compared to supply and use, or if the price is "expensive" relative to supply and use, and should be sold. The key to this right price for grain prices is the relationship between the Total Supply of a particular grain and its Total Use (demand).

The Total Supply of a grain underlying a particular grain futures market is the Beginning Stocks, plus Production, and Imports. When Total Supply is large, grain prices tend to fall under the weight of this excess, as end users put off buying the grain they need until later in the season when the current years production is available as well. Despite the generally accepted, and often accurate, tendency for grain futures prices to rally from planting to pollination, during years when Total Supply is large, commercial grain futures merchants will put off purchases until later in the season, so the normal seasonal trading tendency to rally from planting to pollination is smaller than normal, and late season rallies are more common. However, when Total Supply is tight, grain prices tend to rally very strongly from planting to pollination as end user scramble to fulfill needs ahead of schedule when faced with higher probable prices.

Total Use is the amount of grain consumed or processed in any given marketing year. This includes domestic consumption (crushing), seed use, feed and residual use, exports, and other measures of disappearance. When Use is running at a strong pace, consumers tend to be aggressive in their purchases, while producers tend to with hold supply, causing early season rallies to be strong. However, when Use is slow, consumers tend to put off purchases, to avoid higher storage costs and increased chances of having their stocks spoil or become damaged. This tends to cause prices to break, especially during periods when the risk to supply is diminished (around pollination) or when supply is plentiful (harvest).

So even though in plenty of years, grain prices do tend to rally from planting to pollination, and break from pollination to harvest, in many years they do not because of the current Supply and Use situation. But, if one can understand when prices are "cheap" or "expensive" relative to Supply and Use, then this "right price" can be used in conjunction with the seasonal nature of grain prices to make more accurate price forecasts.

Wm. Grandmill's greatest contribution to grain futures trading was his work with comparing Ending Stocks to Total Use. Grandmill hypothesized (we believe correctly) that the relationship between supply as a percentage of Total Use can correctly forecast the general trend of grain futures prices months into the future.

Ending Stocks are used because Ending Stocks represent the amount of grain left over from this crop year "carried over" into next crop year. Ending Stocks is simply the surplus left over at the end of the year or Total Supply - Total Use = Ending Stocks. By using Ending Stocks as the measure of supply, one can see in a nut shell when Supply is growing relative to Use, and vice versa.

Because Ending Stocks can very greatly from year to year, and the absolute size has increased dramatically in the past decade, this figure can not be used alone. Just using ending stocks is like saying that weighs 200 pounds, and saying they are fat. If this person is 6' 6" tall, then a 200 pound person may be quite thin, while a 200 pound 5' tall person, may be portly. Just as doctors look at height relative to weight, the commodity trader must judge Ending Stocks relative to Total Use, to get an accurate forecast of the relationship between Supply and Use.

What Grandmill did was to compare all the Ending Stocks to Use ratios (Ending Stocks / Total Use) to the price of the particular commodity. What he found was that the higher the Ending Stocks to Use ratio was, the lower prices tended to be around harvest. Lower Ending Stocks to Use ratio's generated higher prices, as supply was tight. He then lined up all of the prices for a specific Ending Stocks to Use ratio, using a scatter diagram, to develop an estimate of the price.

Sample of Ending Stocks to Use Ratio

* based on WASDE Supply and Demand Estimates for December from 1979 to 1998

Wm. Grandmill's analysis has worked well over the years, but due to massive explosion in information available to the grain markets concerning weather, use, and crop conditions, prices have been more reflective of "fair value" faster. It is with this in mind, that we have modified his technique. We do not our modification to be an insult to Grandmill's ground breaking work, and in no way do our modifications diminish the deep respect we have for Mr. Grandmill and his work, we have just found that in the last decade, using our modifications, that our price estimates are more accurate.

The same basic principles of the relationship between supply and demand are kept in tact with our modification, with the only modification we use that our estimates are derived from a change in price from the beginning of planting until harvest, not on the absolute level of prices at harvest.

Because information has become available earlier, and is more accurate due to the explosion of technology, we have found that by judging prices relative to their levels at the start of planting yields a more accurate forecast than Wm. Grandmills original method. The same basic principles for the construction of the charts and tables are used, except instead of using Grandmill's absolute price at harvest, we use the percentage change from the price at the beginning of the planting month until the end of harvest.

For example, looking at Corn, we use the price change from March 1^st (as early planting occurs in the month of March) until December 1^st for the December contract. By using a percentage change, we can compare a situation where prices have started the planting year at 300 to one where prices have started the planting year at 200, and keep the unit of measure the same.

Just like Mr. Grandmill we compared the Ending Stocks to Use ratio for the December Report to that of the price, except instead of an absolute price, we use a percentage change in price from March 1^st to December 1^st.

Sample of Modified Grandmill chart

Like Mr. Grandmill, we use an average of the years changes for our forecast, with the average computed by using the "best fitting" line. Like Mr. Grandmill, we also look at the season high price and the season low price as well, making forecasts for the above.

Using the Modified Grandmill Price Charts

Let's walk through the current crop year to date, and see the power of this type of analysis:

The first accurate USDA estimate of the 1999/00 crop was released on May 12^th, 1999 with an estimated Ending Stocks figure of 1,829 million Bushels and an estimated Total Use of 9,400 million bushels. This yields an Ending Stocks to Use Ratio of 19.5%. With the price of December Corn at 234 on March 1^st, 1999 we refer the above diagram and see that the average percentage change from March 1^st to December 1^st is -3%, with the average rally taking prices 15% above the March 1^st price from March 1^st through December 1^st, and the average break taking prices -15% the March 1^st price during the growing season.

On May 12^th December Corn futures settled at 235 1/2, very near our ending season price. Given that the current Stocks to Use Ratio is in the upper range of the last decades Stocks to Use ratio's, representing a large amount of Supply relative to Use, one could logically expect prices to test the lower extreme of prices first, as consumers will put off purchases. Here is what happened:

From May 12^th to early July, prices broke as is the seasonal "norm". Though prices did go below our estimate, our low side estimate as achieved.

As you can clearly see in this example, Mr. Grandmill's methodology yields powerful , timely, and accurate forecasts for prices. In May, aggressive traders could have established short positions, based on this forecast, seasonality, and the fact that current trend was down, and taken profits 2 months later, reaping an excellent return on margin.

Conservative speculators could have waited for the lower end of the estimate to "tested" and established long positions below 210, as the market broke through resistance at the end of July, armed with the knowledge that history favors that the early July lows will be seasonal lows, and the "odds" favor a rebound in Corn prices, despite the dire predictions of analysts at the time.

Producers and Consumers can use these forecasts to make more informed hedging decisions, either aggressively hedging their crops in May, or waiting for a late season rally above 227 to market their crops, or waiting for a dip below 206 to lock in these "bargain" prices.

By the way, following the July low, December Corn prices shot up to 243 1/2, and have since gyrated back and forth between 210 and 240, in normal seasonal behavior for the later production months.

Let us first thank Mr. Grandmill again for his groundbreaking work. Grandmill was a prolific author, and you can purchase his books at www.tools4traders.com. They are definitely worth reading.

This form of analysis, like any, is subject to unforseen events, and as such involves significant risk. Futures trading, and even hedging, is speculation, pure and simple. A good game plan, using time tested principles, can help tip the scales in your favor, but no method of analysis is fool proof. To quote the old saying "if you can't stand the heat, stay out of the kitchen". Or put more politely, if you do not understand the risks involved in speculation, and are unable to take the financial burdens in speculation, then don't do it.

We strongly believe in our analysis, and the Grandmill method, but we make no promises that it will yield accurate forecasts every time. The purpose of this type of analysis is to spot periods of time and prices where the market "should" reverse. It doesn't have too, but history suggests it should. It is when you act consistently at these times that you are speculating with an "edge", which should help you make a profit or minimize your losses.

Another short coming to this form of analysis is the fact that the movements beyond the extreme's can be great. One always needs to have some form of timing in their trading and hedging, and one needs to practice solid money management. For timing we generally use Point and Figure Charting.