If you have a passing interest in agricultural commodity prices, you would have seen the acronym USDA scattered throughout analysis more than hi-vis and hard hats during an election campaign. The United States Department of Agriculture (USDA) is regularly used as an excuse as to why prices have bounced or slumped. Despite WA being a significant global agriculture exporter, we don’t make the market and are beholden to the ebbs and flows of global production, consumption and ending stocks. But why is a bureaucratic government department in just one country such a price mover?
The USDA is responsible for providing information on crop forecasts, herd sizes, consumption patterns and a whole bevy of other stuff that help inform supply and demand. These reports get the market moving as, quite simply, no-one else has the resources to conduct the level of analysis that the USDA does. The USDA has $US481 billion within their remit for the 2023 year, or 3.8% of the US federal budget. You read that right. Of that, a lazy $US30 billion is for discretionary programs. Roughly $US4 billion is allocated to just support research to advance the competitiveness of US agriculture and promote food security. By way of comparison (and despite Australian bureaucrats being masters of obfuscation when it comes to budgetary matters) the Australian equivalent of the USDA, the Department of Agriculture Forestry and Fishing (DAFF) has a total department budget of $1.5 billion whilst administering a similar number again (e.g., R&D levies), putting total resourcing around $3billion (2023). Although allocations specific to the reporting entity ABARES are not detailed in budget papers, the fact that the market never holds its breath for the latest ABARES report is telling.
So why the US largesse? Transparency reduces uncertainty (i.e., risk) and USDA reports contribute to market stability through transparency, which encourages trade. Perhaps more importantly, USDA reports specifically help position the US in global trade and support market access for US agricultural products, including their financial markets relating to agricultural products. Is it any surprise that international trade is largely denominated in US dollars and hedged by derivatives on US commodity exchanges?
But there is a dark side. Because the USDA has the largest voice, a whisper can be amplified to a scream, as speculators pile in and out as they interpret the latest USDA release.
When forecasts are significantly different from actual production, the price can whip around like an unattended hose, which causes issues with market certainty – the exact opposite of the intended outcome. For those old enough, there is a Hollywood example in the eighties movie, Trading Places, where the twist in the story was underpinned by a leaked USDA report resulting in a not-so-speculative trade on frozen orange juice futures.
For this reason, the USDA is known to be conservative, predictable in their market reporting and, like all forecasters, often wrong. The USDA themselves report on their frailties. For example, the chart below shows the USDA’s annual projections of wheat hectares (grey lines) versus actuals (red line). It’s safe to say that the USDA didn’t get it right very often, and got it more wrong the further out they projected.
Perhaps another way to look at it is that the USDA’s job is not to get it right, but to create a market where others can punt (both ways) which, in turn, creates market liquidity. Just like the increased capture of sports data means that gamblers no longer need to stick to betting on who wins or loses but can get into the weeds and put $20 on their pick for man of the match, the USDA provides an environment in which traders can throw money at the commodity dartboard in a variety of ways without ever planting a seed or driving a tractor.
But make no mistake, those market speculators directly shape the price that the WA farmer receives for their grain, meat and dairy products, which means that the farmer yet to sell their product speculates on the next USDA report too.
