Two University of Illinois ag economist have looked at the accuracy of USDA forecasts of corn ending stocks. You may read the full report on the accuracy of USDA ending stocks for corn on the Farm Doc Daily website. The post is written by Darrel Good and Scott Irwin.
In it the two summarize the accuracy of WASDE forecasts of marketing year ending stocks of U.S. corn from 1990 to last year’s harvest by marketing year. They also discuss the implications for the May 2014 WASDE ending stocks estimates that was just released by USDA. Three main implications emerge. First they report, WASDE ending stocks projections for U.S. corn across the forecasting cycle are basically unbiased, if having a slight tendency towards under-estimation of the final number. Second, the first WASDE estimate of ending stocks for U.S. corn, always released in May before harvest, has a large potential range of errors. This is sensible since the ending stocks forecast at this early point in the forecasting cycle reflects both production and usage errors. Third, there is a clear tendency for the USDA to "smooth" the changes in projections of year ending stocks later in the forecast cycle.
Here’s the bottom line part for the price of old crop corn.
This tendency suggests the WASDE ending stocks forecast for the 2013-14 marketing year released earlier this month (1.146 billion bushels to be left in the bin this fall) may be over-estimated. Intriguingly, this is the reverse of current market expectations that year ending stocks for 2013-14 will exceed the current USDA forecast. It is a price positive change.
Now let’s delve further into the report. Again the 2013-14 marketing year ending stocks are now forecast at 1.146 billion bushels. Historical forecast errors suggest there is a 50 percent probability actual year ending stocks will be between 1.121 billion and 1.267 billion bushels. There has been a slight bias towards under-estimating year ending stocks in this report in the past, with an average error of 49 million bushels. This bias seems to support the market's expectation that USDA has over-estimated marketing year exports, and therefore, under-estimated year-ending stocks.
This last segment supports trade sentiment of a higher ending stocks number for corn and this would put pressure on price to go lower.
However, some previous University of Illinois analysis suggests errors in forecasting year ending stocks late in the marketing year are more highly correlated with errors in forecasts of feed and residual use. There is a positive relationship between the change in the ending stocks forecast in May and the error in the May forecast. If the May ending stocks number goes up, it is more likely to be an associated with an even larger final ending stocks figure. The same is true if it goes down. If the April to May WASDE ending stocks figure falls, then it is associated with an even smaller final ending stocks figure.
While the fit is not great, the relationship is interesting write Darrel Good and Scott Irwin. You may read their work on the Farm Doc Daily website.