From the crop to the price
A desk prices wheat on the world balance: exportable supply against demand. Every WASDE since 1995, kept as published on the day, links the yield nowcasts to the futures market.
Balance
Stocks-to-use, as USDA published it each month
Fixed set of exporters (US, EU with the UK, Russia, Ukraine, Kazakhstan, Canada, Australia, Argentina), so changes in USDA's own grouping do not show up as supply shocks.
Reaction
The balance moves the price, but the news is in the surprise
Signs are right and significant (more stocks, lower price), yet published revisions explain about a tenth of the release-day move: the market trades the revision against expectations. That is the gap an earlier read of the crops can fill.
What the WASDE revision explains
Release-day close-to-close return on the revision of the projected year.
Do the nowcasts anticipate USDA?
Nowcast taken before the report vs USDA's production revision.
| Nowcast | WASDE | Seasons | Correlation | Sign right |
|---|---|---|---|---|
| US HRW -> US | June | 14 | 0.72 | 93% |
| US HRW -> US | July | 15 | 0.28 | 47% |
| France -> EU | June | 12 | -0.02 | 67% |
| France -> EU | July | 13 | 0.29 | 54% |
| Russia -> Russia | June | 12 | 0.67 | 75% |
| Russia -> Russia | July | 10 | 0.08 | 50% |
The US HRW nowcast calls the direction of the June revision in 13 of 14 years; July is close to a coin flip.
Fair value
Public data does not beat the futures price
An out-of-sample fair-value curve (log price on log exporters' stocks-to-use, refitted at each WASDE) has no skill against today's price. Expected for a liquid market: by release day the price already contains USDA's numbers.
| Contract | Horizon | RMSE random walk | RMSE fair value | Skill | Hit rate |
|---|---|---|---|---|---|
| Chicago SRW wheat | 1 report | 9.0% | 8.9% | +0.3% | 55% |
| Chicago SRW wheat | 3 reports | 13.4% | 13.7% | -1.9% | 54% |
| Chicago SRW wheat | 6 reports | 17.0% | 18.4% | -8.2% | 55% |
| KC HRW wheat | 1 report | 8.6% | 8.6% | +0.1% | 54% |
| KC HRW wheat | 3 reports | 13.6% | 13.7% | -1.2% | 52% |
| KC HRW wheat | 6 reports | 18.5% | 19.5% | -5.1% | 56% |