Futures Price Response to Crop Reports in Grain Markets

• Published date: 01 October 2016
• Author: Fabio L. Mattos,Rodrigo L. F. Silveira
• Date: 01 October 2016
• DOI: http://doi.org/10.1002/fut.21764

Futures Price Response to Crop Reports

in Grain Markets

Fabio L. Mattos* and Rodrigo L. F. Silveira

The purpose of this study is to investigate the impact of crop reports from U.S. and Brazil

on corn and soybean futures markets over the period 2004–2014. A TARCH model with

dummy variables to measure the impact of crop reports is used. Results indicate that U.S.

reports consistently affect corn and soybean futures price volatility, while Brazilian crop

reports’impact on volatility is of smaller magnitude. Further, these impacts are generally found

to be stronger when crop reports are released in the months preceding the beginning of harvest.

© 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:923–942, 2016

1. INTRODUCTION

Government has longbeen providing information in commodity markets,such as crop reports

prepared by the U.S. Departmentof Agriculture (USDA). The purpose of public informationis

to helpmarkets become more competitiveand efficient (Knutson, Penn,& Boehm, 1983; Salin,

Thurow, Smith, & Elmer, 1998). However, Sumner and Mueller (1989) claim that public

information is onlyvaluable if it influences agents’decision making in their economicactivity.

They arguethat such services are only effectiveif: i) they are of interest to marketplayers, ii) the

decisions fromthese agents are still pending, iii) thedata and analyses contained in the reports

are accurate, iv) there is no knowledge of the information before the announcement.

In the past, crop forecasts would only be carried out by the government because of the

high costs involved in collecting and compiling such information, in addition to its public

good characteristic. However, the concentration and greater integration of commodity

markets over time, along with increasing participation of financial investors, has attracted the

private sector to the generation and dissemination of agricultural markets information.

Moreover, debates about the relevance of public data to commodity markets, budget

reductions within the federal government and decreasing government participation in the

economy have motivated broader participation of private companies in the collection of

market data (Garcia, Irwin, Leuthold, & Yang, 1997).

Prices of financial assets and commodities tend to fluctuate following new information

on supply and demand, such as those in crop reports. Under the Efficient Market Hypothesis,

prices will reflect the new information present in the reports (Colling & Irwin, 1990).

Fabio L. Mattos is an Assistant Professor, Department of Agricultural Economics, University of Nebraska-

Lincoln, 303A Filley Hall, Lincoln, Nebraska. Rodrigo L. F. Silveira is an Assistant Professor, Institute of

Economics, University of Campinas, Campinas, SP, Brazil. The second author thanks FAPESP (S~ao Paulo

Research Foundation) for the financial support of this research.

*Correspondence author, Department of Agricultural Economics, University of Nebraska-Lincoln, 303A Filley

Hall, Lincoln, NE, 68583-0922. Tel: 402-472-1796, Fax: 402-472-0776, e-mail: fmattos@unl.edu

Received February 2015; Accepted October 2015

The Journal of Futures Markets, Vol. 36, No. 10, 923–942 (2016)

© 2015 Wiley Periodicals, Inc.

Published online 20 November 2015 in Wiley Online Library (wileyonlinelibrary.com).

DOI: 10.1002/fut.21764

Therefore, when quantifying the volume of information from these reports that is actually

new, it becomes possible to measure the value of such information services. Several empirical

studies since the 1970’s have investigated the impact of public information on agricultural

markets (Miller, 1979). Most of them have focused on U.S. markets and used event study

methodology to measure price response to USDA crop production reports and livestock

inventory reports. These studies have generally found that prices respond to the arrival of new

information, indicating that USDA reports have informational value (Carter & Galopin,

1995; Colling & Irwin, 1990; Colling, Irwin, & Zulauf, 1992; Colling, Irwin, & Zulauf, 1996;

Fackler, 1985; Fortenbery & Sumner, 1993; Garcia et al., 1997; Grunewald, Mcnulty, &

Biere, 1993; Isengildina, Irwin, & Good, 2006; Isengildina-Massa, Irwin, Good, & Gomez,

2008a,b; Karali, 2012; Lehecka, 2014; McNew & Espinosa, 1994; McKenzie, 2008;

Milonas, 1987; Schroeder, Blair, & Mintert, 1990; Sumner & Mueller, 1989; Taylor, 2012).

The literature on this topic is vast, but still mostly focused on USDA reports. No study

has explored the price impact of public reports from other countries. This can be explained by

the historically dominant role of the U.S. in world agriculture, along with the reliability of

USDA reports in terms of data and announcement schedule. However, in the recent past,

public agencies from other countries have made efforts to improve the collection and

dissemination of agricultural data, including better crop reports and a more reliable

announcement schedule.

One example comes from Brazil, where the federal government provides monthly

harvest forecasts through CONAB (Brazilian Food Supply Company).

1

As Brazil is a major

grain producer, it is possible that market participants also follow CONAB reports closely.

Brazilian corn production increased fourfold between 1980 and 2014, reaching about 3

billion bushels in 2014–2015 (10% of the world production). In addition, Brazilian corn

exports recently exceeded 800 million bushels per year, accounting for almost 20% of world

exports. For soybeans, Brazilian production increased six fold in 1980–2014, reaching 3.5

billion bushels in 2014–2015. Brazil is currently one of the major producers and exporters of

soybeans, accounting for 30% of world’s production and 40% of world’s exports.

USDA reports also provide information about Brazilian crops. However, USDA and

CONAB have distinct processes to collect data and a different schedule to release the

information. CONAB uses a combination of field observations, remote sensing,

georeferenced information, satellite positioning, and statistical models to prepare forecasts

for Brazilian grain crops. On the other hand, Brazilian crop information released by USDA

comes from overseas posts of the Foreign Agricultural Service (FAS) Attacheswith additional

sources (such as private and public sources around the world, satellite images and weather

information). Further, CONAB reports are usually announced a few days earlier than USDA

reports. Thus, market participants interested in information about Brazilian crops would

typically have access to CONAB reports first, and then to USDA reports.

Therefore, market participants can follow both USDA and CONAB reports to be

continually updated about crop conditions and forecasts. In addition, we hypothesize that

crop reports receive more attention during specific times of the year, namely during the

growing season and before harvest. In other words, market participants may not assign the

same importance to every monthly crop report, but rather focus on those based on

information collected during critical periods for grain development and closer to harvest

(Lehecka, 2014; Taylor, 2012; Sumner and Muller, 1989), which is a point that has not been

extensively discussed in previous research.

1

CONAB is a public agency under the Brazilian Ministry of Agriculture, Livestock and Supply (MAPA), responsible

for the execution of Brazilian agricultural policies related to price support, public storage, market supply and foreign

trade. In addition, CONAB participates in the formulation of Brazilian government agricultural policy.

924 Mattos and Silveira