WASDE: Market impact and accuracy; Oh, really?
June 12 will be the next time USDA issues its World Agricultural Supply and Demand Estimate (WASDE), and the market is already anticipating what will be revealed in that report. And, in fact, the market is already issuing projections of what the USDA will report on such issues as corn and soybean production and carryover. While a recent USDA study says WASDE reports can move the market by substantial amounts on days they are issued, another economic study suggests that the accuracy of the information contained in WASDE reports is not always 100%.
Between the 8th and the 12th of each month, USDA staff members within the World Agricultural Outlook Board chair an interagency committee of specialists who assemble domestic and foreign production and consumption information on major crops, and release the information to a market that is ready to respond either bullishly or bearishly to the data. According to a USDA study published in the recent Amber Waves electronic newsletter, USDA’s Economics Research Service (ERS) looked at 350 WASDE reports and resulting commodity market responses from 1981 to 2012.
The report said, “ERS estimates that, following WASDE’s publication, the average report causes an immediate price change of about $190 per contract for cotton and soybeans and almost $140 per contract for hard red winter wheat at recent prices. These price changes, which correspond to a 1-day return on collateral of around +5 percent to a cotton and wheat trader and +8 percent to a soybean trader, signify that WASDE updates market expectations and is therefore informative.” To quantify the impact, the ERS study said, “In 2009, cotton and wheat traders held on average 100,000 contracts on report days; soybean traders held four times as many.”
In addition to the USDA study’s contention that the report had information that was of value to the market, the report also concluded, “Overall, findings reveal that markets value the situation and outlook information published in WASDE and rapidly incorporate that information into futures prices. Reports that included NASS crop survey data are very informative but so are most reports that do not contain production information for row crops. Lastly, WASDE affects multiple simultaneously traded contracts for the same commodity about equally, and the report’s impact increases during low-inventory periods.”
With the quantification of how the WASDE reports impact the market, and particularly in times when commodity levels are diminished, the accuracy of the WASDE estimates is being called into question. A trio of economists from Clemson University (Olga Isengildina-Massa), the University of Georgia (Berna Karali) and the University of Illinois (Scott H. Irwin) studied the WASDE reports from the 1987/88 crop year to 2009/20102, and agreed with the USDA study about market impact, by saying, “It has been widely documented that the release of many USDA reports moves the markets…volatility in corn and soybean futures markets increases about 7 times on report release days.”