With one big cut, USDA restores some traders' faith

Reuters News
|
Posted: Jul 11, 2012 6:46 PM
With one big cut, USDA restores some traders' faith

By K.T. Arasu

CHICAGO (Reuters) - To people like grains analyst Robert Bresnahan, the U.S. Department of Agriculture took a big step on Wednesday toward restoring its credibility, which had been damaged by two years of volatile data and far-off forecasts.

The USDA, often criticized for making modest, incremental monthly adjustments to its crop forecasts that fail to reflect real conditions, cut its forecast for the drought-damaged U.S. corn crop by 12 percent, far more than analysts had expected, yet in line with what many of them believe is probably right.

The cut may not be enough to wipe away the memory of volatile stockpile reports and "fuzzy math" forecasts that have roiled the market and infuriated many traders, but it may help temper a growing view that the world's gold standard in grain fundamentals had lost its Midas touch.

"It was a major stand to regain some credibility," said Bresnahan of Trilateral Inc In Chicago. "Money managers are going to pay a lot closer attention to them now."

Cutting its yield estimate put the USDA almost on par with some of the private crop forecasters that have sprung up to satisfy the demand for data from deep pocketed money managers and other investors who have turned to grains to diversify their assets.

Weather-related crop failures in Russia, Australia and other major grains producers have fueled rallies at the Chicago Board of Trade, the global citadel for grains trading, netting windfalls for those with access to accurate data.

The first USDA report to cause a ruckus was issued on June 30, 2010. The agency's estimated quarterly corn stocks came in 288 bushels below the average forecast, kicking off a rally that took prices to a record $7.99-3/4 a bushel last June.

In an accompanying report on the same day, the USDA forecast of how many acres would be planted with corn in the United States was 1.35 million acres less than expected in a survey of analysts, a bullish factor for prices.

In the next quarterly report on September 30, 2010, the USDA revised up its estimate of U.S. corn stocks by nearly 300 million bushels more than the average estimate of traders.

CONSERVATIVE APPROACH ABANDONED

Many traders had expected the USDA to maintain on Wednesday its traditionally conservative approach to adjusting its estimates, despite weeks of evidence that the worst drought in a quarter-century was inflicting serious damage on the corn crop.

Instead, the USDA cut its yield estimate by an unprecedented 20 bushels to 146 bushels per acre, sending Chicago Board of Trade corn futures up more than 3 percent. Prices ended lower when weather bureaus forecast rain.

"They had no choice but to do the right thing," said commodities broker Shawn Hackett, president of Hackett Financial Advisors and publisher of the Hackett Money Flow report.

"They did a good job of addressing and recognizing the situation by putting out a number that is definitely in the realm of where things are," he said.

Analysts are expecting another cut in the USDA's corn yield estimate in August, when the agency bases its forecast on actual feedback from farmers.

The USDA remains the final arbiter of crop data not just for the United States but globally, with CBOT traders relying more on the agency's data than data from anywhere else in the world.

"They do the best they can," said John Baize of John Baize and Associates, an international agricultural trade and policy consultant. "It is hard, and at times they have been wrong."

(Reporting by K.T. Arasu)