When all is said and done, predicting the damage done to U.S. corn and soy crops from the worst drought in half a century may have been the easy part.
With the harvest imminent and plants mature, most traders are fairly confident they have a handle on this year's supply. Whether corn yields are 120 bushels an acre or 130, it's clear that demand will outstrip supply, possibly by a wide margin. Demand, in trade parlance, will have to be "rationed.”
What's far less clear ― and harder to discern now than ever before ― is just how much less food, feed or fuel will be made from corn as buyers cut back. From food companies to livestock ranchers to ethanol plants, the calculations are complex: Can end consumers withstand higher prices? Can they sustain production with cheaper grain alternatives?
For traders, that complexity is multiplied. The unpredictability of dry weather is nothing compared to the vagaries of consumption by livestock producers, exporters, ethanol makers and other industrial users that turn corn into scores of products including plastics, adhesives, explosives and pharmaceuticals.
So after two months of relatively steady price gains as every passing hot, dry day withered the crop a little more, some are bracing for a bumpy spell in which traders attempt to second-guess the price point at which demand is rationed.
"Demand occurs in so many different categories that it's a little hard to get your hands around," said Darrel Good, a respected agricultural economist with the University of Illinois and a foremost authority on the topic.
"The thought process is pretty clear, but quantifying things is pretty subjective."
USDA cut its 2012/13 U.S. corn crop forecast by 4.011 billion bushels, or 27 percent, over the past two months and slashed its estimate of corn use across all demand segments by 2.55 billion bushels, or 19 percent.
U.S. inventories at the end of next summer are now expected to fall to 650 million bushels, a 17-year low and considered near the bare minimum required to prevent an unprecedented scramble for the last kernels. As recently as June, the USDA had forecast 2 billion bushels.
Few traders expect those numbers to be final, with the agency fine-tuning for months to come.
In theory, the mystery of demand should offer opportunities for smart traders to capitalize on volatile markets. In practice, the evidence needed to quantify demand can be so disparate and piecemeal that it defies order.
U.S. export sales are the easy part, strictly reported on a weekly basis. For everything else it's a case of scouring data on livestock slaughter rates, chicken egg sets or sow liquidation; anticipating government policy on ethanol; or seeking private market intelligence on how much wheat is replacing corn among pig farmers.