Is there a problem with USDA grain stocks estimates in corn?
In sum, one pattern is abundantly clear--there has been a sharp decline in analysts' ability to anticipate actual quarterly corn usage as implied by NASS Grain Stocks reports since the start of the 2006 marketing year. This has undoubtedly decreased confidence in the integrity of the underlying stock estimation procedures among at least some market participants. Since this pattern coincides with the era of tight supply and demand conditions and elevated grain prices that began in the autumn of 2006, there has been much discussion about how the two may be possibly related. While it is not surprising that market participants are highly sensitive to data on stocks when supply and demand conditions are tight, the mechanism that ties together these conditions and the decline in analysts' ability to anticipate NASS stocks estimates is far from obvious. Our analysis indicates that any explanation needs to satisfy at least four criteria to have credibility:
1) Why corn and not soybeans? The number and magnitude of surprises in the corn stocks estimates/implied usage must be explained in light of the absence of similarly large surprises in soybean stocks estimates.
2) Why 2006-2012 and not earlier? A notable increase in the volatility of market surprises in corn stocks estimates/implied usage was observed starting with the 2006 market year and the increase compared to earlier periods must be explained.
3) Why only in particular marketing years? The size and magnitude of surprises in corn stocks estimates/implied usage show large variation from year-to-year during 2006-2012 and tended to be concentrated in the 2009, 2010, and 2012 marketing years. The occurrence in certain years and not others must be explained.
4) Why a pattern of reversals during marketing years? The pattern of surprises in stocks estimates/implied usage within the marketing year during 2006-2012 must be explained, and in particular, the tendency toward reversals within the 2009, 2010, and 2012 marketing years.
There has indeed been a marked decline in the ability of market participants to anticipate USDA stock estimates for corn in recent years. In this sense a problem has developed with corn stocks estimates. Numerous explanations have been offered for the decline, ranging from problems with the survey procedures used by the USDA to the rise of ethanol production. Any explanation must be able to account for several key patterns in the usage surprises in order to be valid. Our next post in this series will delve into the explanations offered by market participants to determine if they can in fact explain these patterns.