Market Matters Blog

USDA has put out some strange estimates this year that seem to conflict with reality. USDA's March corn stocks estimate of 5.4 billion bushels was one example; the upward of adjustment to the estimate of planted corn acres in USDA's Acreage report is another. Dealing with dubious USDA grain estimates is nothing new. It has become a part of the cost of doing business in the ag sector, so I thought it would be interesting to look at USDA reports from a more practical standpoint. Each month, USDA releases its World Agricultural Supply and Demand Estimates (WASDE) and, for that one day each month, the market's attention is focused on whether the numbers are bullish or bearish to grain prices. Knowing that prices have a tendency to over-react to short-term events, I devised a study to look at the impact of USDA's monthly report on prices over the past five years.

USDA's monthly WASDE report is typically released somewhere between the 8th and 12th of the month. In this study, I used December corn as the test price and noted whether it closed higher or lower on the day of the report. I then noted what prices did from the report-day close to the end of the month. I wanted to know if a higher close on report day, for example, carried through with higher prices for the rest of the month. After all, if USDA reports are so important, they should have significance for more than just one day.

I have to admit, the results were a little surprising. Over the most recent 65 months, prices followed the report-day direction 32 times and went against the report-day direction 33 times. In other words, no matter what direction prices took on the day of the report, it was still a coin toss as to how the rest of the month would finish. In addition, if you wanted to gamble on the outcome from the report-day close to the end of the month, you would have been better off going against the direction of the report-day close. In 65 trades of one December corn contract, going against the direction of the close on report day would have hypothetically made just over 3 cents a bushel per trade, not including the cost of commissions or slippage. I am not advocating that as a trading plan, just highlighting the lack of significance that WASDE reports typically have beyond their one day of fame.

Please don't misunderstand. I am not saying that USDA reports aren't important to the market. But they are not flawless, and fifty percent of the time, prices do not deserve the move that ensues on the day of the report. Beyond the actual day of the WASDE report, it is hard to see a significant impact on prices. Markets are complex and attuned to a wide variety of constantly-changing information. USDA estimates are just one small piece of the puzzle. For anyone trying to make profitable marketing decisions for their grain, it would be a good idea to keep that in mind.