Conclusions and Implications

Conclusions and Implications

This paper reviewed and analyzed dozens of previous studies in order to establish the state of knowledge about the accuracy, reliability and market impact of USDA reports.  The need for this study has been repeatedly expressed in the popular press and by producer groups across the country.  Agricultural producers are the foundation of USDA information system as most of it is survey based and relies on honest voluntary participation. Therefore, better understanding of USDA reports and the value they provide to agricultural markets would help maintain the quality of USDA information through increased survey participation rates.

One of the biggest concerns is that USDA reports increase market volatility.  This is unequivocally true. However, it is not a bad thing.  It is a signal that these reports provide new information to the market and the market uses this information to find a new equilibrium price that more closely reflects underlying fundamental conditions.  In fact, if we observed the opposite, we could interpret it as a lack of value of USDA information.

Furthermore, volatility is not equivalent to uncertainty.  When we are looking at forward measures of market uncertainty, such as implied volatility from options prices, we see a drop in implied volatility following report releases, indicating a reduction of market uncertainty due to this information.  Additionally, informational value tests indicate that estimates contained in USDA crop production reports often bring us closer to the final value. Thus, we can conclude that even though these reports increase volatility, they help decrease future market uncertainty.

This would only be possible if USDA information was accurate and reliable. Most of the evidence confirms this argument.  Even in cases where some shortcomings are highlighted, such as smoothing in production forecasts or lack of uncertainty information in price forecasts, it is difficult to find better sources of information and previous research shows that private forecasters are not able to beat USDA in most cases.  Once again, the evidence that markets react strongly to USDA forecasts that sometimes are similar in accuracy to their private counterparts is an indication that market participants view USDA as a reliable, objective source.

Given these findings, can market volatility resulting from report releases hurt agricultural producers with open positions in the futures markets?  The answer to this question depends on the nature of these positions. Based on the evidence of swift market reaction to USDA news shown in previous studies, these market moves would be most dangerous for short term speculative positions.  Therefore, previous studies emphasized the importance of hedging around the reports.  Hedged positions would include offsetting effects from cash and futures markets and may result in higher margin requirements in the short term, but an unchanged hedge outcome upon hedge completion.

Overall, it is important to recognize the role of USDA information in market price discovery and reduction of information asymmetry.  Without USDA information, agents with better resources and access to information would have an advantage over the rest of market participants through having a better insight of what the true market conditions are and what the equilibrium price should be.  USDA helps uncover these market conditions for all market participants thereby providing a level playing field for all, even though the process is sometimes bumpy.  In order to maintain this role and ensure the quality of this information, it is important to keep communication lines open.  USDA cannot produce reliable estimates without participation of producers.  Producers need to trust USDA and their approaches in order to be willing to participate in the information gathering process.  Greater transparency and communication between these two critical sides of public information system is needed to maintain its integrity.  While some efforts to facilitate this communication, such as USDA data users’ meetings, are already in place, greater efforts can be made to increase transparency of USDA outlook and data products.  One of the most effective ways of doing this would be to have an experienced statistician who is directly involved in USDA forecasting process tasked with communicating forecasting practices, challenges, procedures and limitations with the public on the regular basis in order to “open up the black box.”