Reliable crop estimates as powerful force
July 12, 2011
To say that crop production estimates being issued this year by the U.S. Department of Agriculture are more important to grain-based foods than ever before would be judged a monumental overstatement. Yet, in light of the behavior of grain markets so far in 2011, the massive power of these reports clearly stands out amid a nearly unprecedented array of forces influencing both supply and demand for wheat and other grains. Indeed, recent developments serve to reinforce studies indicating that the volatility of futures prices is about seven times greater on days that Crop Production Reports are issued as compared with non-release days. That finding, primarily in reference to corn and soybean futures markets, but equally applicable to other grains like wheat, serves to define not just the great importance of the crop report data but also how essential it is for market participants to have confidence in the reports and to be knowledgeable about how they are compiled.
These reports focusing on crop acreage, yield and production have been a fundamental part of market analysis for nearly two centuries. Prepared by what is now named the National Agricultural Statistics Service in the U.S.D.A., the reports are based on scientifically-sound crop estimating and forecasting procedures that have been improved over the years. Because these data are estimates that gather specific information from a sampling of more than 100,000 farmers spread across the entire country, they are far from perfect. Yet, few serious errors have ever occurred, and the differences that do draw attention between the official data and previous private and trade estimates hardly have ever prompted questioning about the veracity of the data. Discrepancies that do occur most often stem from misinterpretation of yield information, causing gaps that are closed by subsequent reports.
This very high acceptance among the leadership of most sectors of grain does not mean that the compilers of these figures avoid all allegations. Fairly recent studies have quoted market participants who allege that the U.S.D.A. has a “hidden agenda” in preparing its crop estimates, such as seeking to control farm program costs by artificially moving prices or even a desire to control food costs in the service of a politically-motivated master. Whether or not it is alleged that someone wants prices to be higher or lower is less important than the wildly misdirected worry that crop estimates are affected by strategies that lack any substantive proof.
Without delving into the care exercised by N.A.S.S. in putting together the crop report data, of assembling it on an area-by-area and state-by-state basis, of using expert observers as well as producers as collaborators, it is hardly necessary to look beyond the way the final reports are assembled to realize the sanctity of this information. Data are locked up and data from major producing states are encrypted for transmission to Washington. Offices where data are received are secured. Final reports are agreed upon under “lock up,” with the meeting location isolated behind locked doors. Windows and elevators are covered, and all communications are disconnected until the 8:30 a.m. release time.
Even those businesses that conduct their own crop estimating, to facilitate their private position-taking and in a number of instances as services provided to others, tend to avoid challenging the N.A.S.S. reports, regardless of how far their own estimates may have been from the government’s outcome. In other words, crop reporting ranks as one of the soundest, most objective and most scientifically based of all the data gathering in which the federal government is engaged. The experts who guide in assembling this information have won well deserved praise for their forecasting methodology as well as for the consistency of procedures followed year-after-year. At a time when disagreements about the accuracy of data are commonplace, grain-based foods has much to be thankful for in contemplating the excellence of the work that goes into making those eagerly anticipated crop reports.