Todd's Take

July WASDE Report Reminds Not All Estimates Are Equal

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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On Wednesday, July 12, both December corn and November soybeans closed lower after USDA estimated a record corn crop and higher-than-expected ending soybean stocks for 2023-24, two estimates that don't have much substance behind them. (DTN ProphetX chart by Todd Hultman)

If you've ever been in a federal courtroom, you know when the judge makes a pronouncement from the bench there is weight behind the words. The decor of the courtroom, the stiff formality of proceedings, the presence of a bailiff, the lower positions of the prosecutor and defendant versus the higher seat of the judge all add to the gravitas of the verdict rendered. The outcomes aren't always fair or just, but there is no argument they carry weight, right or wrong.

In a similar way, the supply and demand estimates from USDA's monthly World Agricultural Supply and Demand Estimates (WASDE) reports carry a certain weight in the markets. They may not have the same pomp that accompanies a judicial ruling, but the estimates that were released shortly after 11 a.m. CDT on July 12 were the result of a tedious and elaborate process. It didn't just come from some guy in an office with a dartboard.

As USDA explains, the monthly WASDE report is prepared by the Interagency Commodity Estimates Committees (ICECs), chaired by analysts from the World Agricultural Outlook Board and includes representatives from the Agricultural Marketing Service, Economic Research Service, Farm Service Agency and Foreign Agricultural Service. It's a complicated mix of analysts and bureaucrats that have their hands in the pie -- maybe too many hands, but that's another topic. The point is a lot of intentional analysis and collaboration goes into deciding WASDE estimates and, right or wrong, markets often react as if the estimates are important. On July 12, that important feeling lasted almost a day.

In general, the deliberative process that governs courtroom procedure is a good way to look at markets. Examining evidence from different perspectives by experts in their field helps avoid the mistakes of rash decisions. Intentional analysis of evidence, using the cerebral cortex, is what distinguishes estimates from guesses, which come more from the anatomy's backside.

Theoretically, if everyone did their job without bias, USDA's estimates should be reasonably reflective of the markets they describe. However, real life isn't that easy. Important information is constantly changing and crops only grow so fast. There is no easy mathematical formula for interpreting widely varying weather events into yields per bushel, two and a half months or more forward. As the famed management consultant, Peter Drucker, once pointed out, when it comes to future events, no amount of analysis does much good. We can add all the layers of bureaucracy we want, but the obstacles of the unknown follow their own time schedule and are not swayed by political pomp.

In the case of the July WASDE report, the planting estimates for corn and soybeans have a reasonably accurate history when weather doesn't interfere. There is no good way, however, of estimating either corn or soybean yields in July, no matter how much weather data you take in. Anyone willing to peek behind Oz's curtain will see that USDA's production estimate for U.S. corn in July has a 90% confidence interval of plus or minus 17.9% over the past 42 years. Based on past estimates, that puts USDA's July 12 corn production estimate somewhere between 12.6 billion bushels (bb) and 18.1 bb, which is not very helpful.

Assuming traders are adults, there's no use complaining about those that responded to USDA's crop estimates in July as if they were accurate and sold corn and soybeans. That free expression is part of the game and, like all of us, they will reap what they sow.

USDA's July report is a good reminder that estimates are no better than the information they're based on. Planting estimates based on a survey in early June that has a decent track record will never be perfect but have proven to be generally reliable. On the other hand, making yield estimates for corn and soybeans in early July based on a historical weather trend and a casual observation of "extreme dryness in June" is about two degrees north of a dartboard guess.

For anyone who wants to understand markets, life's unknowns demand respect. At this time in the new-crop season, instead of pretending USDA or anyone else knows what fall yields will be, it's more important to keep our eyes open. Now in mid-July, December corn appears reluctant to trade below $4.90 until we learn more. November soybean prices, on the other hand, are well-supported despite USDA's larger-than-expected ending stocks estimate. Widespread drought is real and the weather between now and harvest will have the largest say in how things turn out from here. No amount of pomp can change that.


Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

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Todd Hultman