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What drives price discovery?

USDA building mug
Understanding USDA’s role in the markets can help farmers make more informed decisions.

Last summer, Jim McGivney watched corn prices plummet as ethanol demand fell and crop reports pointed to a 16 billion-bushel crop. “I was looking to 2021 and worried that if a vaccine wasn’t developed, how was I going to be able to market my corn? You can’t rent land here at $3.25 per bushel,” says the northwestern Illinois farmer.

“It was a big crop all summer long — until those September USDA reports.”

McGivney was hardly the only farmer in America perplexed by USDA’s abrupt revisions last fall. It seemed to many that markets were being taken on a wild ride, driven in large part by government reports.

Markets gyrate on reports

What USDA took away last spring, it gave back big time by fall, if you were following along at home. USDA was forced to revise 2020 corn yields down due to derecho damage, frost in the Upper Midwest and widespread drought across the Heartland in the final days of the corn growing cycle. Coupled with tectonic economic shifts due to COVID-19, USDA has so far reduced the 2020 corn crop by nearly 1.5 billion bushels since May.

But there was more to the story. New ending stocks data not previously available to USDA necessitated a 205 million-bushel reduction in June 2020 corn stocks in September to reflect higher usage rates. Those revisions sent corn and soybean prices rallying past pre-pandemic and pre-trade war levels. McGivney lost out on some of the upward price potential after not adding call options to his marketing plan, as USDA’s estimate adjustments sent prices soaring.

“I missed out on that, which really frustrated me,” he says.

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Negative view

While USDA’s most recent reports fueled major corn and soybean rallies, most farmers hold a negative view of the department’s reporting. A March Farm Futures survey found 43% of respondents believed USDA reports had a negative impact on their farm’s profitability.

The reality is quite different, as Farm Futures’ analysis shows. Prices for corn, soybeans and wheat increase or stay the same by virtually the same amount as price decreases in the trading session after USDA’s release of the Crop Production and the World Agricultural Supply and Demand Estimates reports.

Quarterly grain stocks reports have favored price decreases for soybeans slightly more than those of Crop Production results in the day following the report release, but not by an extravagant margin.

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More harm than good?

So why do so many farmers believe USDA reports do more harm than good? Renowned behavioral scientist Daniel Kahneman points out that people largely judge an incident by how they felt at its most vivid moment and not by cumulative experiences.

It’s easy to remember that sinking feeling from March when markets thought 97 million acres of corn were going to be planted after ethanol demand all but vaporized. But it’s hard to ignore the rallies fueled by revisions to June 2020 stocks after the Sept. 30 Quarterly Grain Stocks report.

Especially considering corn and soybeans were on a downward price trajectory in the week leading up to the report and eventually rallied 17.4% and 20.7% higher, respectively, in the months following its release.

Recent report revisions are unclear to many farmers despite USDA’s best efforts at transparency. Understanding USDA’s role in the markets can help farmers to make more informed decisions.

What moves the market?

Most market price movement occurs after USDA’s acreage and yield adjustments, as well as grain storage inventory reports. USDA collects data from large samples of farmers (in some cases as many as 100,000) across the country on an ongoing basis beginning in March to make these estimates.

The sampling process involves a combination of farmer surveys answered via telephone, online or in an in-person interview, as well as satellite imagery, mapping systems and computer software packages. Farmers are asked to report acreage, yield forecasts and on-farm grain storage volumes through a system that has moved increasingly online since the pandemic’s onset.

Additional methods are used to compare results. Advanced statistical methods combine the sampling approaches to derive acreage, yield and stocks estimates. Adjustments are made as needed, especially if weather and market forces significantly impact crop development or usage rates.

Accounting for bias

“Any time you do survey work, there is always a possibility of bias,” says Lance Honig, crops branch chief at USDA’s National Agricultural Statistics Service. “Some comes from the fact that we sample as well as the biases of survey respondents.”

Each survey result is analyzed over the growing season and compared to the final estimate to determine any potential bias in results. This allows statistical biases to be accounted for over time and adjusted.

“Farmers tend to underreport yields,” Honig says. “The Objective Yield survey tends to overstate yields. But part of the estimating
process is to account for these biases and adjust for them.”

USDA’s response rates have dipped as the shrinking U.S. farmer population becomes increasingly busy with managing their farming operations. By reporting timely and accurate data to USDA, farmers can help the department to more accurately inform market participants.

Data analysis is as much of an art as it is a science. Measurement errors, including miscalibrated scales and variable test weights, and human error are possible at every point in the data collection process.

The mission of NASS is “to provide timely, accurate and useful statistics to U.S. agriculture.” Information that is consistent over time improves reliability, which is something the department takes seriously, Honig says. USDA annually reviews collection procedures and methodologies, adjusting as needed.

“Changes do happen; although admittedly, it does not happen a lot,” Honig explained at the 2020 USDA Data Users’ Meeting in October. “When a change is made, it will be data-driven.”

And while the department can typically reduce variability surrounding estimates, they remain just that — estimates.

“Nothing is perfect,” says Ryan Kelbrants, an analyst and broker at CHS Hedging LLC. But they “often have a margin of error when working with that much data.

“USDA has a vast array of resources to collect data between satellites, farmer surveys, phone interviews, online questionnaires, statisticians and analysis programs,” he says. “It is challenging for companies in the marketplace to match their capacity to gather and analyze so many market variables.”

“There are policies in place that guarantee minimum levels of reliability across geographic levels,” Honig explains. “Data always changes, but reliability is maintained over time.”

Murky global forecasts

Not all of USDA’s reliability estimates are as dependable as those of domestic crop production. International ending stocks projections have a much larger variance compared to domestic estimates. The lack of transparency from overseas data makes it difficult to calculate accurate foreign grain flow estimates compared to domestic projections.

“One of the things we try not to do is forecast changes in policy, including changes in policy by foreign countries,” explained Mark Jekanowski, World Agricultural Outlook Board administrator, at the October USDA meeting. “The situation is fluid.”

To form international estimates, USDA relies on data from its Foreign Agricultural Service workers in other countries to collect, analyze and evaluate international metrics. Grain flows can vary by year, country, commodity, weather, political regime and so on. USDA officials are privy to some transparency surrounding other countries’ forecasts, but it varies.

What it means to farmers

Amid planting and harvesting activities, as well as the vast amount of work that goes into managing a farm operation, farmers don’t have a lot of free time to run advanced statistical analysis on USDA estimates.

Market advisers can help farmers to bridge that gap. Brokers, analysts, bankers and business media rely heavily on USDA data and forecasts to help farmers create and execute marketing and operational plans. Most can trace their research back to USDA statistics in some capacity.

These estimates not only drive futures and cash prices for grain, but also help all players in the ag supply chain, including processors, input suppliers, logistics companies and policymakers. Input businesses depend on acreage and yield knowledge to operate.

“Speculators use these numbers to buy into grain markets, as we’ve seen over the past few months,” Kelbrants says.

USDA’s public data can help these industries forecast their production in a cost-effective manner, which ultimately translates to lower farmer and, eventually, consumer food costs.

USDA statistics are widely regarded by the global marketplace as the benchmark for domestic and foreign agriculture statistics. The trade considers the department’s statistics to be verifiable, consistent and reliable, which allow forecasters to make in-depth calculations and predictions about future market movements so farmers can minimize risk and maximize profit potential.

“The market trades those numbers,” Kelbrants says. “USDA is the golden standard for everybody. No other company has as much data and is as transparent with it.”

Taxpayer cost

Government spending on these market reports is small relative to the impacts the statistics can have on the markets. USDA’s total budget for 2021 will top $146 billion. Of that total, USDA will spend $1.8 billion on agencies supporting the research, education and economic reports that drive price discovery.

For comparison, the U.S. taxpayer will pay $2.8 billion for the new B-21 long-range strike bomber expected to take flight this December.

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Timing is everything

Timing is a critical component of grain marketing. The same is true for grain market reports. USDA’s public data release ensures speculators and end users do not trade on the data before it is available to farmers.

“Everyone has access to the information at the same time,” Kelbrants says. “It creates a fair marketplace for all parties involved.”

“One of the greatest opportunities farmers have to help improve these reports is to fill them out when they receive the surveys,” Honig says. “We are in this together, and we want to work to help the farmers. The more effort farmers can put into completing these reports, the better the information USDA puts out.”

Knowledge is the most valuable currency in today’s information age. Markets trade on information as it becomes available. Some data, such as exports, are reported and traded on before USDA has a chance to issue weekly export reports or even monthly forecasts. So, by the time monthly WASDE reports issue updated grain usage rates or supply forecasts, the results may already be baked into markets.

“Any time the market moves, there are opportunities for profit,” McGivney points out. “A farmer with good insurance found opportunities to protect profits this year.

“My outlook is more positive now,” he concludes. “They do the best they can with the information they have.”

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