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Veteran Advisor

USDA Reports; You Grade 'Em

It's been an interesting marketing year, already. As the funds get to one side of the boat (very short the market), the USDA seems to be trying to balance the market psychology out by getting to the other side of the boat (market-friendly) with their latest report.

As you look back, at the past 12-months' worth of reports, how do you feel the USDA has performed with their estimates and supply/demand tallies?

What part of the reports do you think the USDA does a good (consistent) job on and what parts continue to make you scratch your head?

 

Mike

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4 Replies
Veteran Advisor

Re: USDA Reports; You Grade 'Em

It seems to me that the 'funds' are more trend followers than trendsetters.  Sometimes when the trend appears strong, they tend to really load up, which exaggerates the trend, or at least pulls it forward in time.  Trends change.  Perceptions of trends change.

 

I don't think it's the job of the USDA to attempt to 'balance' market psychology, nor to even consider it.  Supply/demand tallies are what they are, tallies of factual data without bias, or at least that's what they should be.  Anything beyond that becomes prognostication. 

 

Any official projections should be supported with a range of possibilities, and the probabilities they have assigned to their most likely of scenarios.  For example, if their reports assume a national average 2016 US corn yield of 165, then they should also disclose their confidence levels, such as 90% probability of a yield of 160-170, and a 95% probability of a yield of 150-180, or whatever they might be.  Or something similar, but based entirely on historically solid statistical information which is openly made available to anyone.  Then, the same process applies to any other non-factual data, such as acreage projections, and usages.  Of course, the projections can change as often as the factual bases used in the development of those projections changes. 

 

I suspect that the USDA essentially does what we really think they should be doing.  Sometimes it just doesn't appear that way. 

 

My own perception, unchanged over time, is that the USDA reports tend to build in things that influence prices negatively based on projections, yet tends to make adjustments that influence prices positively based mostly on proven facts.  For example, it might take a nearly perfect growing season to achieve record high yields, yet nearly perfect growing seasons are not 'normal' growing seasons.  When excessive moisture or drought threaten potential yields, there seems to be more of a lag in the adjustments to the projections.  Still, the market seems to act pretty much in similar fashion -- it takes continuous good price news to move the markets up, yet a break or lack of the good price news is enough to move the markets down.

 

Just my own not-so-well-informed opinion.

Honored Advisor

Re: USDA Reports; You Grade 'Em

When there is a bad weather year and obvious lower crop supply, they can pull numbers from the previous crop year and borrow numbers from the next crop year to lessen the severity of the market gains. When there is a good crop year and a plentiful supply, they simply supply the farmers with insurance and diaster payments.......just high enough to keep farmers in business for another year.   They have the formula for an inexpensive food supply in the United States.    That is all you really need to know. 

Veteran Advisor

Re: USDA Reports; You Grade 'Em

WCMO,

 

Well, thanks for your perspective. You have been at it awhile, so your experience in following the USDA means something, for sure.

Yes, funds tend to be momentum followers. And they tend to sit on their positions for a long time. It's interesting that you see the USDA, ultimately, doing what we expect them to do. I wonder if this is shared by others?

 

Thanks,

 

Mike

 

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Veteran Advisor

Re: USDA Reports; You Grade 'Em

Thanks.  For most of my past, until quite recently anyway, I was not aware of some of the detail available from the periodic reporting.  I was only aware of what I read in the news stories and snippets of information provided.  With the internet, it's possible to find a lot more stuff than we otherwise were previously able to readily view and evaluate.  For that, I apologize for some of my past ill-conceived thoughts.  A good place to visit --

 

http://www.usda.gov/oce/commodity/wasde/

 

For example, on historical accuracy of annual 'final estimates' compared to January projections, I was able to pull up a spreadsheet that showed:

 

For soybeans, over the past 34 years, the US January ending stocks forecast has been below the final estimates 8 times, and above the final estimates 26 times.

 

For corn, over the past 34 years, the US January ending stocks forecast has been below the final estimates 20 times, and above the final estimates 14 times.

 

For me, that implies a long-term historical price bias lower for soybeans (Jan report influencing lower prices than final number would imply), and higher for corn (Jan report influencing higher prices than final number would imply).  Some time, I need to take a look at similar information for more meaningful or applicable time periods, like just the past 5-10-15-20 years, to see if there are many differences or variations based on the time periods.  For corn, anything prior to significant ethanol usage is less meaningful, at least in my opinion.  I'm sure all that information is available, if one has the time to find and dig it out.

 

Never enough time to look at all these things -- that's why I stop in frequently to see what the 'experts' are saying.

 

And, the understatement of the year from an investment advisory newsletter I just read, "Investors dislike losses more than twice as much as they enjoy gains" -- applies to all us farmers, too.

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