Sunday, October 23, 2011
Uncertainty and USDA reporting
The agricultural markets will become more volatile because the USDA will cut some of the reports they produce on demand and supply conditions. The USDA cutback as part of government budget declines will have an impact on trading markets. If there is less information on supply and demand there will be more focus on any remaining report produced by the USDA. This will increase the focus of any uncertainty on specific dates. It will also mean that there will be less overall information and the ability to cross check USDA reports from various perspectives. The cost of hedging will go up given the premium necessary to hedge this uncertainty.
Information gathering has a public good feature. Private services will provide some information and in some cases this information may be better, but it will be available only to subscribers first. This will create an information edge, albeit short-term for those that receive this private good. The increase in volatility from cutting information may be lead to real costs in agriculture markets and may be more costly than the actual report production. Given the size of the US agriculture sector and the impact of futures on world markets, this may be the time for more information gathering not less.