Market Matters Blog
Imaginary Numbers
The soybean market is still reeling from USDA's July 11 supply and demand report where soybean ending stocks for 2013-2014 were increased to 140 mb, due to a reduction of residual use to a minus 69 million bushels. Maybe you are asking yourself: How can a demand category can possibly be negative?
As DTN Markets Editor Katie's article "The Root of Residual," states, a negative residual use number isn't anything new. In fact, I remember working with her predecessor Pat Hill on a similar article back in 2007, the last time USDA played this powerful wildcard.
It should come as no surprise that I disagree with this practice and here I provide a point-by-point counter argument to USDA's explanation contained in Katie's article. I seriously question the process USDA follows.
The piece states that residual is a statistics term, a numeric value that represents how far off your original predictions were. This includes the abstract (another fun math term) "discrepancies in measurement." Again, the idea that USDA, or anyone, knows how many bushels (tons) are actually produced, used, and left over is a fallacy. It's all estimates built on estimates, with things like residual use making up the difference.
P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]
For now I'll leave the assertion that the hilarity that is corn quarterly stocks can somehow be tied to the inability to reconcile its balance sheet alone, except for the comment "counting new-crop as old-crop."
The crux of the matter is that the National Agricultural Statistical Service seems to have an interesting equation. In the piece it states this formula: Supplies - Use - X (residual use) = Ending stocks. With it being stated that residual use is the ONLY variable, the conclusion is that ending stocks are assumed before all demand can be subtracted. In times when supplies don't seem to be there, that means residual use has to be dropped into negative territory to maintain the expected ending stocks figure.
I wish I could do my accounting that way. I would estimate my life savings considerably higher, then create a debit category that can be negative to make it a "reality." That would be fun right up to the point of another powerful government agency telling me it isn't exactly legal, with penalties soon to follow.
I find it interesting that toward the end of the piece USDA says domestic soybean ending stocks-to-use hasn't fallen below that magical 4.5% level -- until now. But, given the open-ended system of accounting USDA has at its disposal, don't be surprised if enough 2013 bushels are eventually found to bring us back to this imaginary floor (the July ending stocks-to-use figure was 4.1%).
Why the false floor in soybean ending stocks to use? It's simple: What would happen if the world's largest buyer of soybeans was told supplies might not be available to meet demand? And that your largest competitor has boatloads of them ready to move?
I could go on forever. The bottom line is as it always has been: These reports are unnecessary up until the point that all the variables, including residual use, have been given a value. In other words, there is no need for the monthly volatility created by USDA, NASS, and WOAB guessing at what the supply and demand situation is.
Come this October, when all the tallying has been done for the 2013-2014 marketing year (not the 2014 crop mind you), a single, final report should be released. The information would be outdated enough that the markets shouldn't react, but valuable enough for later study when analyzing past supply and demand issues.
That's it. One report that looks back rather than trying to project forward, and without the fanfare that surrounds what we see today.
But it will never happen. It will never be allowed to happen. Therefore imaginary numbers like soybean residual use will continue to cause havoc for U.S. (and global) producers.
(CZ)
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