Wheat: Will High Inventory Further Dent Prices?
2 months ago 7ring Comments Off on Wheat: Will High Inventory Further Dent Prices?
That said, the relationship between the level of ending-stocks-to-use ratio and subsequent price changes is pretty close to neutral (Figure 4). High level of ending stocks don’t necessarily further depress prices and low levels of ending stocks don’t always cause bull markets. This makes sense in an efficient market. Information regarding inventories is quickly incorporated into prices and one cannot gain an advantage by trading off of it subsequently. That said, there is still one relationship that jumps out regarding the impact of ending stocks: when inventory levels are high, price volatility tends to be low and when inventories are low price, volatility tends to be high. This makes sense in that, if demand for wheat rises in a high-inventory environment, it can be met quickly by liquidating inventories. Prices don’t have to soar to incentivize additional production the next season as might be the case in a low- inventory environment. This helps to explain the lack of volatility in wheat options, which currently demonstrate a remarkable lack of worry about the future. Watch out, one bad harvest and inventory levels could fall, sending both prices and volatility higher.