Market Matters Blog

When I first saw the headline last Friday, "USDA 2013 U.S. Corn Planted at 97.4 Million Acres," I felt an immediate twang of disappointment. Don't get me wrong, I knew that Friday's reports were capable of surprise and tried to warn readers about it frequently. However, I could not help but think of producers in Iowa and surrounding states looking at large areas of wet, unplanted fields and wondered what they must be thinking. That report from USDA was one more surprise in a long history of surprises. For those who may still be a little stunned, I would like to point out a common trap to avoid for the future.

The surprise of USDA's acreage estimate did not just happen on Friday morning. The first flaw in the group-think process, Part A, began in late-March with USDA's Prospective Plantings report. USDA describes the report as "a probability survey that includes a sample of over 83,500 farm operators." In other words, some producers were contacted in the first two weeks of March and asked what they intended to plant in the upcoming spring. It is not all that scientific, but for some reason, once that estimate is out, many talk as if it were good as gold.

Part B of the process starts with the Crop Progress reports in April. Each week, approximately 4,000 designated observers send in their reports of fields in their area to the National Agricultural Statistics Service (NASS) Field Offices in their states. Hopefully, all 4,000 observers take their responsibilities seriously and make an honest effort to do a good job, but they are human and USDA admits that the observations are subjective, meaning that there is plenty of room for error. In addition to the weekly Crop Progress reports, we also watch the weather and hear additional bits of information. We take all this in and try to combine Part A with Part B. In this case, we take the 97.3 million corn acre estimate from USDA's March report and combine it with the Crop Progress estimate that 95% of the corn was planted as of June 9 and come up with 4.9 million unplanted acres of corn. Given that, it seemed reasonable to expect that USDA would reduce its March estimate by at least two million acres, but USDA takes a different approach.

In the first two weeks of June, USDA conducts another sample survey of 70,000 producers and asks them what they planted, gathers the results and adds their own judgments. The June survey has the potential to be much different from the March survey and has nothing to do with the Crop Progress Reports. In other words, while the general public tries to take A plus B to get C, USDA ignores A and B and comes up with a new C. That is why I tried to constantly warn in comments ahead of the report that the June estimate was the first meaningful acreage estimate of the year and had the potential for surprise.

Just how good are USDA acreage estimates? Since there is never an audit of planted acres, we have no way of knowing for sure, but I did come up with one way of testing their validity. For the past 20 years, I compared two sets of numbers: USDA's U.S. ending stocks estimate in the July WASDE report and the September 1 corn stocks estimate in the final quarterly Grain Stocks report of each crop year. The July ending stocks estimate is the first one of the season that is based on USDA's acreage estimate at the end of June. The final corn stocks estimate of the season is what I consider to be the most accurate USDA report of the year because it occurs when corn stocks are at their lowest levels. As it turns out, even with all its flaws, the July ending stocks estimates are not too bad (you have to remember that my expectations are low). Out of the past 20 years, the July ending stocks estimate was higher than the final corn stocks estimate 10 times and lower 10 times. In 16 of the 20 years, the July estimates were within 400 million bushels of the final stocks estimate. Four years, however, were way off. 2004-05 saw the worst July estimate with a prediction that missed the final mark by 1.1 billion bushels.

Overall, it is important to remember that all USDA estimates have flaws. The U.S. ending stocks estimates typically get better after the June Acreage report, so it is hard to completely dismiss Friday's estimate of 97.4 million acres. Fortunately, we do not have to rely exclusively on USDA reports. USDA reports are important, but we have plenty of other tools to help us understand the markets as the year progresses. If you have not done so yet, you may want to check out DTN's Six Factor Strategies. http://goo.gl/…

Todd Hultman can be reached at todd.Hultman@telventdtn.com

(CZ)

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