# 1 Introduction

Here we explore the viability of modelling the price of corn as a function of stock-to-usage. The market receives new information about the state of global stocks once a month after the WASDE reports have been published. As the global balance sheets change during the course of the season the expectation of the stock levels left over at the end of the season changes. We aim to model the corn price along the futures curve as a function of stock-to-usage percentages of the major producing and consuming nations. We add a proxy for energy by looking at the average WTI crude price during the prior month. Furthermore we also consider the dollar strength as measure by the dollar index.

The plot below shows the evolution of the corn stock-to-usage numbers for the United States and World levels.

We want to connect these stock-to-usage numbers with price of the corresponding corn futures contracts. To do this we connect the price data between two successive WASDE reports with the first report and aggregate the results. As an example consider two reports dated 2018-05-11 and 2018-06-12 respectively. All price data between those two dates are associated with the first date.

The images below give a graphical representation of the data. The x- and y-axes represent the Stock-to-Usage and Price of the July contract respectively.
From the images we can distinguish between two different regimes roughly corresponding to before and after 2007. This can be seen by the clear separation of the larger and smaller points in the plot below. I am not sure if there is some fundamental reason for the separation of not. It might have to do with pre and post GMO.

# 2 Deterministic Model

From the bubble chart above it looks like a linear model should be sufficient to model the July corn price as a function of stock-to-usage. Here we look at a couple slight modifications to improve upon the simple linear model. It looks like the data clumps together around \$4 for stock-to-usages greter than 15. We see that the prices are decreasing at a slower rate with increasing stock-to-usage numbers. Linear models on the other hand assume a constant rate of decrease. Here we look at two alternative models, a power-law and exponential model, both of which have decreasing rates of change.

To find the best model it amounts to looking at the three different graphs below and deciding which has the best linear fit to the data. The equation describing the models are given below

Linear: $y = x \times m + c$

Power-Law: $y = x^{m}\times \exp\left(c\right)$

Exponential: $y = \exp\left( x \times m + c \right)$ In all three equations above $$x$$ and $$y$$ represent stock-to-usage and price respectively.

By eye the results look fairly similar. The table below summarises the results and provides the coefficients to plug into the model. The best fit models seems to be the Power-Law model. For best results we recommend averaging the results of the three models.

The table below summarises the results of the model fitting. Each cell shows the R-squared value of the fit. The models with the greatest R-squared values are shown at the top. From this naive in-sampe point of view we can see that United States Corn Stock-to-Usage is the best predictor followed by world and world withouth China Stock-to-Usages. The next most important features are Mean Month Prior Crude and the Dollar Index. In the following we have a closer look at the relationship between price and the main predictive features according to the table below.

exponential linear power law
unitedstates_Corn_s2u 0.64 0.64 0.69
world_Corn_s2u 0.57 0.57 0.63
worldnochina_Corn_s2u 0.52 0.53 0.56
crude 0.51 0.48 0.48
dollarindex 0.40 0.38 0.41
ruble 0.32 0.30 0.33
expiry 0.14 0.13 0.13
argentina_Corn_s2u 0.12 0.12 0.09
brazil_Corn_s2u 0.07 0.06 0.09
ukraine_Corn_s2u 0.03 0.02 0.05
china_Corn_s2u 0.08 0.07 0.03
russia_Corn_s2u 0.03 0.03 0.02

The model coefficients are given in the table below.

model Rsq m c code
linear 0.55 -26.09 765.87 H
power law 0.61 -0.53 7.39 H
exponential 0.56 -0.05 6.70 H
linear 0.61 -27.47 789.43 K
power law 0.67 -0.54 7.43 K
exponential 0.62 -0.05 6.74 K
linear 0.64 -27.63 797.42 N
power law 0.69 -0.54 7.43 N
exponential 0.64 -0.05 6.75 N
linear 0.70 -23.15 732.56 U
power law 0.74 -0.47 7.25 U
exponential 0.71 -0.05 6.66 U
linear 0.76 -18.64 677.61 Z
power law 0.78 -0.38 7.02 Z
exponential 0.76 -0.04 6.56 Z

## 2.1 Deterministic Model Sensitivity

Taking the values from the table above we plot the model predictions in blue. The latest USDA United States stock-to-usage is given by the vertical orange line. The horizontal orange line gives the latest C N9 price. The results can be interpreted in two ways. If we take the USDA numbers as the truth we need to see a downward adjustment in price. On the other hand we can imply a stock-to-usage from the latest price. Currently this number is much less than that reported by the USDA.

# 3 Probabilistic Model

If we discretise the stock-to-usage percentages we are able to do some statistics on the values of the prices given stock-to-usage (or any other feature) in the discretised basket. In this way we can perform Bayesian statistics on the prices, i.e. given a forcast on the stock-to-usage we can determine the probability that the price is contained withing some interval.

In the subsections below we show plots of the price statistics when the value of the underlyiing feature falls within the bucket specified on the x-axis. The solid black line shows the median price. The light and dark shaded regions show the 10th to 90th and 25th to 75th percentiles. The fat of the distributions lie withing the dark shaded region. For reference we also show the USDA and Polar Star fundamental forecast together with the latest price data. These are represented by the vertical and horizontal lines respectively. The same data used to create the images is also given in tabular form below the plots.

p10 p25 p50 p75 p90
(4.99,6.22] 614.325 653.125 689.500 726.7500 752.725
(6.22,7.45] 599.550 616.250 650.750 704.5000 744.700
(7.45,8.67] 388.000 406.625 487.500 527.0000 582.500
(8.67,9.89] 393.300 430.750 593.750 760.2500 786.600
(9.89,11.1] 394.800 411.125 486.500 526.6250 568.050
(11.1,12.3] 380.700 390.000 397.250 410.7500 459.300
(12.3,13.6] 363.150 373.750 388.375 409.5000 449.775
(13.6,14.8] 362.750 385.125 402.750 440.6875 472.075
(14.8,16] 370.000 378.000 396.250 423.0000 509.000
(16,17.2] 363.500 367.750 374.250 381.5000 406.850

## 3.1 World Stock-to-Usage

p10 p25 p50 p75 p90
(9.89,11.5] 625.600 661.2500 694.750 726.7500 747.300
(11.5,13.2] 398.000 549.2500 619.500 667.0000 779.000
(13.2,14.8] 378.750 392.3125 447.625 521.2500 578.925
(14.8,16.4] 371.000 397.1250 423.000 464.7500 511.700
(16.4,18.1] 364.500 376.7500 387.500 402.7500 440.800
(18.1,19.7] 364.950 371.2500 385.500 398.5625 412.775
(19.7,21.3] 363.725 370.5625 396.250 405.7500 448.775
(21.3,23] 361.550 364.3125 370.625 373.2500 374.250
(24.6,26.2] 399.500 399.5000 399.500 399.5000 399.500

## 3.2 World Stock-to-Usage without China

p10 p25 p50 p75 p90
(7.15,8.08] 644.000 685.2500 710.750 733.0000 756.500
(8.08,8.99] 588.300 611.0000 641.250 663.2500 703.400
(8.99,9.91] 383.800 394.4375 406.250 484.1250 520.125
(9.91,10.8] 384.500 392.2500 409.750 507.0000 773.250
(10.8,11.7] 369.000 381.3750 403.500 451.2500 556.550
(11.7,12.7] 359.475 373.3125 402.125 440.6875 547.875
(12.7,13.6] 367.250 377.5000 392.625 424.6875 486.875
(13.6,14.5] 364.700 369.2500 385.500 405.0000 421.400
(14.5,15.4] 384.700 392.5000 403.750 412.5000 486.900
(15.4,16.3] 369.150 380.5000 396.250 405.3750 412.600

## 3.3 Mean Crude

p10 p25 p50 p75 p90
(33.3,43.8] 360.250 367.2500 375.250 389.5000 408.500
(43.8,54.3] 364.250 372.5000 382.750 399.2500 415.675
(54.3,64.7] 369.425 386.5625 397.250 408.5625 451.500
(64.7,75.2] 363.000 378.7500 392.750 408.1250 426.650
(75.2,85.6] 373.750 392.1875 421.375 565.0000 670.875
(85.6,96] 422.275 520.9375 645.500 721.2500 747.000
(96,106] 422.750 469.5000 558.125 646.6875 685.875
(106,117] 459.250 468.5000 483.750 600.6250 698.450
(117,127] 578.475 588.8125 611.000 633.6875 641.350
(127,138] 591.275 641.9375 732.500 782.1250 799.450

## 3.4 Dollar Index

p10 p25 p50 p75 p90
(72.1,75.2] 585.550 613.500 671.500 724.0000 774.400
(75.2,78.2] 407.750 425.625 525.250 615.7500 694.000
(78.2,81.3] 370.000 395.625 471.250 644.6875 713.425
(81.3,84.3] 382.375 418.750 495.625 643.9375 760.250
(84.3,87.3] 370.750 383.500 401.750 415.0000 432.000
(87.3,90.3] 382.500 390.000 398.250 406.5000 420.700
(90.3,93.4] 371.750 377.250 379.000 381.3750 420.500
(93.4,96.4] 364.000 374.500 389.250 399.3125 411.975
(96.4,99.4] 364.575 373.750 393.500 405.9375 438.725
(99.4,103] 364.550 368.500 373.875 382.1250 389.200

# 4 Ensemble Model

We have created ensemble machine learning models that predict the corn price along the futures curve. These models take as inputs the stock-to-usage percentages of the top corn producing and consuming nations together with the dollar index and month prior average crude price as proxies for the US Dollar and energy respectively.

The ensemble models we create are all random forest regression models. We create a train and test split and perform hyper parameter tuning on the training set using 3 fold cross-validation. Within the training data we perform oversampling to the less representative feature ranges. Fore more information of how to perform oversampling correctly we refer the interested reader to this link. Ensemble models are a natural extension of the single variable deterministic models in that they are able to gain predictive quality from possible interactions between the different input features.

From the best models we determine the variable importance of all the input features. The results are sumarised in the plot below. The greater the importance the larger the effect of that feature on the predicted values. The dashed red line shows the value of importance if all the features were equally important.

Notice that the features with greatest importance is unitedstates_Corn_s2u. In all the cases shown above this feature makes up more than 50% of the variable importance of the ensemble models. The table below gives the R-squared values of the ensemble models fitted to the data. Notice the significant improvement over the deterministic models.

R squared
N 0.84
U 0.76
Z 0.77
H 0.85
K 0.92

## 4.1 United States Stock-to-Usage Sensitivity

As the United States Stock-to-Usage percentages increase we expect the price of corn to decrease. This intuition is confirmed in the plots below. The y-and x-axis show the model prediction and value of United States Stock-to-Usage respectively. Here we fix all parameters to the latest WASDE numbers, but allow the value of United States Stock-To-Usage the change from 5 to 20. In the plots below we see the quasi monotonic decreasing relationship between the two variables. We can also see transition values that resembles a phase transition for values of United States Stock-to-Usage around 10.

To obtain the plot below we aggregate all the sensitivity results all along the curve. The horizontal line showing the latest price is the mean value along the curve. The idea is to give a feel for what range of United States stock-to-usage numbers will result in large price moves.

## 4.2 World Stock-to-Usage Sensitivity

As the World Stock-to-Usage percentages increase we expect the price of corn to decrease. This intuition is confirmed in the plots below. The y-and x-axis show the prediction and value of World Stock-to-Usage respectively. Here we fix all parameters to the latest WASDE numbers, but allow the value of World Stock-To-Usage the change from 10 to 40. In the plots below we see the quasi monotonic decreasing relationship between the two variables. We can also see transition values that resembles a phase transition for values of World Stock-to-Usage around 13 to 14.

## 4.3 World Stock-to-Usage without China Sensitivity

As the World without China Stock-to-Usage percentages increase we expect the price of corn to decrease. This intuition is confirmed in the plots below. The y-and x-axis show the prediction and value of World without China Stock-to-Usage respectively. Here we fix all parameters to the latest WASDE numbers, but allow the value of World Stock-To-Usage the change from 10 to 40. In the plots below we see the quasi monotonic decreasing relationship between the two variables. We can also see transition values that resembles a phase transition for values of World without China Stock-to-Usage around 9 to 13.

## 4.4 Crude Sensitivity

As the cost of energy increases we expect the price of corn to increase. This intuition is confirmed in the plots below. The y-and x-axis show the prediction and value of crude respectively. Here we fix all parameters to the latest WASDE numbers, but allow the value of the prior month crude price the change from 40 to 80. In the plots below we see the monotonic increasing relationship between the two variables. We can also see an elbow forming at crude prices greater than 75.

# 5 Only Crude, US and World Stocks

Here we focus on the three features with the greaterst feature importances,

• US stocks,
• World stock, and
• crude.

Below we show the feature importances of the reduced models.

Notice that the features with greatest importance is unitedstates_Corn_s2u. The table below gives the R-squared values of the ensemble models fitted to the data. Notice the significant improvement over the deterministic models.

R squared
N 0.79
U 0.73
Z 0.66
H 0.83
K 0.88

# 6 Model predictions given USDA numbers

The plot below shows the ensemble model predictions for USDA forecasted fundamentals. It is difficult to pin down the value of crude, so we consider a range of values form 50 to 60. Furthermore we consider all the predictions from each of the decision tree models to determine prediction statistics. The normal output of a collection of regression trees is the mean of all the predictions. In the plot below we show the 25th to 75th percentiles of the predicted prices, this corresponds to the area between the two gray curves. The latest price data is represented by the black curve. The median model prediction is shown in blue. here we use the median as it is les likely to be skewed by possible outliers.

From the images above the corn prices are more or less aligned with the current fundamentals. There might be an opportunity on the downside in N and U.

##### Mauritz van den Worm
###### Portfolio Manager and Quantitative Researcher

My research interests include the use of artificial intelligence in managing commodity portfolios