Oct 8, 2010

Who do you trust?
The proposed rule changes to the Packers and Stockyards Act have sure gained a lot of attention from members of the House and Senate. Last week, several lawmakers wrote USDA Secretary Tom Vilsack asking him to conduct a thorough economic analysis of the proposed rule changes, which seems like a reasonable request.

The government has invested a lot of money on research to simply identify any problems in our evolving livestock marketing system. One would think that doing an economic analysis about any regulations dealing with markets would be the first thing USDA or any other agency would do before moving forward. The lawmakers who produced this letter said, “It is our opinion that the government should not take on the role of manipulating domestic supply, cost or prices. This proposed rule is a clear invasion of the government into the private market place.”

Ironically, the government is involved in many industries and markets where they have the ability to move prices and influence supply.

USDA’s reporting of the corn markets is one of those markets that they have a lot of influence over. USDA’s September carryover estimate had a wild influence on the market. We have always scrutinized the integrity of USDA’s reporting methods. This time, the report showed USDA found an additional 300 million bushels of corn in carryover stocks. Many traders and analysts were stunned by the news, and the market dropped 28 cents the day after that report came out.

USDA increased their estimate of corn carryover supplies to 1.7 billion bushels. This was a 21 percent increase above what most corn market analysts had expected. This would represent a pretty big statistical screw-up in my book. For some reason, USDA’s corn reports consistently contain some unforseen swing in acres, yields, maturity or some other aspect of corn production. Perhaps it is terribly complicated and there are too many variables to allow for any degree of accuracy. Sometimes you can have too much information.

I imagine the fact that USDA’s statistics are so unpredictable is why we have a large number of private firms gathering and evaluating their own data. So, whose data are you going to trust when it’s time to buy or sell?

When it comes to projecting yields, it’s a bit easier to understand the variability in USDA’s numbers, but carryover is different. It’s difficult to understand how 300 million bushels can just show up.

To put a bit of contrast in the corn data, the private analytical firm Lanworth told their clients last week that their ground surveys, computer models and satellite image analysis indicates there were 1 million more corn acres planted and 1 million fewer soybean acres planted than USDA reported on June 30. One would think 1 million acres’ difference would have a large impact on the total crop production and available corn and bean supplies. It would, of course, move the market.

USDA was preparing to release their World Agricultural Supply and Demand Estimate last Friday and yields will be what everyone will be examining. In midsummer, USDA was thinking 165 bushels per acre (bpa), but the agency adjusted that number down to 162.5 bushels in mid-September. Now that harvest is well underway and yields have been reported on at least a third of the corn crop, we should have more reliable information. The average analyst guess is 159.9 bpa with a range of 156.3 to 162.1 bpa. The folks at Lanworth said that this year’s National Agricultural Statistic Service October corn yield forecast has a two-out-of-three chance of falling between 156.8 and 161.9 bpa. However, if there really are 1 million unreported corn acres out there, there should still be plenty of corn to go around and it will certainly move the market.

The December corn futures started its midsummer rally July 27 when it was $3.77, certainly a more palatable number for cattle feeders. Conversely, October feeder cattle futures started their decline July 27 at a peak price of $117.65. They drifted down to $108.93 last Thursday. The corn/feeder cattle relationship is still alive and well. I know we say it every year, but the integrity of USDA’s reporting does have a dramatic effect on the markets, whether the information is right or wrong.

Perhaps counting cattle is a bit easier than corn, and I tend to trust the private market analysts over the government analysts. But in these inventory and production projections, it’s not wise to bet against the government. I hope they do find that extra 1 million acres of corn that Lanworth thinks is out there so we can maintain this feeder cattle market. — PETE CROW