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Do USDA Reports Increase or Decrease Market Uncertainty?

Do USDA Reports Increase or Decrease Market Uncertainty?

Even though markets react to USDA information by moving to a new equilibrium which results in significant price changes as demonstrated by the studies discussed so far, it would be incorrect to automatically interpret these price changes as increases in market uncertainty.  The next two sets of studies help provide insight on this issue.

Table 4 lists the studies that measure options market reaction to USDA reports. These studies focus on how the arrival of new information alters the amount of uncertainty that market participants expect to be resolved before option expiration as indicated in changes in option implied volatility.  Implied volatility is a forward-looking measure of volatility that reflects changes in expectations of market participants about future uncertainty.  Around scheduled news events, resolution of uncertainty is characterized by a rise in implied volatility before the announcement date, a peak on the day before the announcement, and a fall to a new lower level on the report day, as shown in figure 11. For example, McNew and Espinosa (1994) find reduced implied volatility in corn and soybean options after release of USDA Crop Production forecasts. They observe that if market participants make their decisions on the basis of both risk and return, then any information which would reduce risk is valuable. If USDA reports reduce price uncertainty, then they are viewed as being more credible. 

Isengildina-Massa et al. (2008) demonstrate that WASDE report releases reduce uncertainty in corn and soybean markets about 70% of the time over 1985-2002.  Implied volatility in these markets dropped substantially more following the sessions that contained both WASDE and NASS Crop Production reports (by 1.1 and 1.5 percentage points in corn and soybeans, respectively) compared to sessions that contained only WASDE reports (0.3 percentage points in both corn and soybean markets).  Furthermore, it appeared that the impact of these reports increased during the later sub-period associated with greater market uncertainty.  Cao and Robe (2022) extend these findings to demonstrate that market uncertainty in corn and soybean markets decreases not only immediately following the report release but remains low for up to five days after the release of WASDE, Grain Stocks, Prospective Plantings and Acreage reports.  Following WASDE reports, this decrease in market uncertainty was more pronounced when there had been greater disagreement among industry expectations prior to the reports.  There was little evidence that tightness of stocks affected market reaction to these reports.  Furthermore, it appears that market reaction (drop in implied volatility) was stronger during the periods of greater market uncertainty modeled using changes in the VIX index.

On the other hand, Adjemian et al. (2018) examined patterns in implied volatility to assess whether October 2013 WASDE report, which was not issued due to government shut down, was “missed” by the markets. Using daily and intraday data, the authors found that “corn and soybean markets did not display characteristic patterns in terms of uncertainty resolution and price changes that are normally observed around scheduled USDA release times, meaning that options prices (and therefore the price of hedging) were higher than they likely would have been had a WASDE report come out,” (p. 669) thus confirming the uncertainty-reducing features of USDA reports.