Ep 22. Do Large Export Sales Reports Move Futures Prices?

[00:01] Intro/Outro
Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence, presenting conversations and analysis about risk and risk management for food and agriculture supply chain decision makers from farmers to consumers and everyone in between. This is relevant risk.
[00:19] John Anderson
Hello, this is John Anderson, Director of the Fryar Price Risk Management Center at the University of Arkansas, here with Associate Director, Andy McKenzie. Andy, how are you doing today?
[00:26] Andy McKenzie
I’m doing good, John. Ready to talk about markets again.
[00:29] John Anderson
Absolutely. It seems like it’s been a while. I think you did one of these without me. I feel like I hadn’t been here. I’ve been AWOL a little bit.
[00:35] Andy McKenzie
Well, it’s good to have you back.
[00:36] John Anderson
Well, thank you. I appreciate that. So, we want to talk today a little bit on a kind of a market behavior topic or price behavior topic related to some work that we’re doing here at the Fryar Center. But before we get into that specific work, I think, Andy, we kind of want to set the stage for the conversation a little bit.
[00:53] John Anderson
And I think to do that, basically what we’re going to talk about today is information, right? I mean, information moves markets.
[01:02] Andy McKenzie
Right. Exactly.
[01:03] John Anderson
Prices respond when new information enters a market, we talk you know, you teach a futures market class. I’ve taught futures market classes in the past and ag prices classes. And I’ve talked to students a lot of times about, you know, why are prices hard to predict? Well, price is hard to predict because information’s hard to predict, right?
[01:19] John Anderson
I mean, the information hits the market randomly, so to speak, and prices respond to that. And that’s a very basic kind of understanding, there is a lot more complexity we could get into that. But the idea is that markets thrive on information, prices assimilate information by moving right, by moving in response to that information.
[01:41] John Anderson
And there’s a ton of research out there in the ag economics world that our peers have done and that we’ve been involved in where we look specifically at how markets respond to information. And so, I want to talk a little bit about that literature to kind of kick us off, Andy. Because I know that you’ve dug into this literature deeply, you’ve contributed to this literature.
[02:01] John Anderson
But one of the ways that we look at how markets are affected by information is by this tool that we call an events study. Tell us about events studies in markets.
[02:12] Andy McKenzie
Yes, I mean, event studies, basically, if there are some important events that hits the marketplace, how do prices then react to that event? Do they adjust? So, if we have new supply and demand based on the event occurring, do prices adjust accordingly? And, you know, a huge area where people have looked at this sort of issue is do markets move the way you’d expect them to when the US government releases a report such as the World Ag Supply and Demand Estimate.
[02:43] John Anderson
So, the report release is the event?
[02:45] Andy McKenzie
The report release is the event, and that it basically what that report does is it conceptualizes where supply and demand is for different commodities at any point in time. It’s actually released every single month. So, the US government is continually updating supply demand information and releasing it to the marketplace. Hopefully, and I think most people have found in the body of research that have looked at this, that futures markets will respond in a rational and an efficient manner when this report is released or any sort of report to that matter.
[03:19] Andy McKenzie
Right. So, you know, if there is more supply hitting the market, you would expect to see prices to go down, and so forth. Now, one thing, though, that’s I’m being a little general here because to a lot of people it seems confusing. They know that these world ag supply demand reports are important to the marketplace, but they’re sort of confused if they see more supply being reported, say, for corn, they may be surprised when they don’t see corn prices go down.
[03:46] John Anderson
Right.
[03:47] Andy McKenzie
And so that’s sort of confusing, right?
[03:49] John Anderson
The report, yes, it is. And people do get confused by that. And I know I’ve been in extension meetings where people get upset by this. You know, the report came out and it looked great and prices went down. And the key there is that the report’s not released into a vacuum. Right?
[04:09] Andy McKenzie
Exactly. So, the market has already got some sort of expectation as to what supply and demand is. So, the only thing that moves the price is if the US government numbers are different to what was previously anticipated by traders or the marketplace.
[04:25] John Anderson
So, to do this kind of work, you’ve not only got to have the report information, you’ve also got to have the expectation that existed prior to the report’s release.
[04:36] Andy McKenzie
That’s exactly right. And in this particular case, there’s a whole bunch of private firms trying to project or forecast what the U.S. government numbers are going to be. So, it’s quite easy to look at that difference and see how prices react to that. In more general terms, though, if you look at it, any type of event, it can be hard to figure out why prices adjust the way they do to the event, because, again, to some extent, the market might have already priced in that event.
[05:03] Andy McKenzie
And so, you wouldn’t necessarily see what you think’s going to happen, happen. And that’s where things get confusing.
[05:09] John Anderson
Yeah, if you don’t have, if your personal expectations one either don’t exist, you have no expectation of what’s going on or your expectations are at odds with the pre report consensus, that’s when you’re on the wrong side of that move.
[05:24] Andy McKenzie
I think that’s, you know, that’s one of the main roles I see we as economists or ag economists doing is in some sense, we’re sort of validating that the market is behaving the way we think it should. And legitimately, adjusting to prices, prices adjusting, I should say, the information. And so, you know, I think that’s important because as we know, one of the two main benefits of a futures market is what we call price discovery or price transparency.
[05:53] Andy McKenzie
And that’s very important because we know that most transactions in the cash market, whether it’s an elevator with a farmer doing a forward contract that’s benchmarked against what the futures is. So, if the futures aren’t adjusting and giving us a fair market price, then that’s meaning we don’t really know what the true price is and maybe transactions are not occurring as they should at the prices that they should be, you know, transacting at.
[06:20] John Anderson
Yeah. And you’re describing what any academic ag economist is going to recognize is the structure conduct performance paradigm for evaluating markets. Right. You’re talking about the performance part of that, like how do markets perform at what they’re supposed to do. This is kind of, this events study approach is one of the key diagnostics that we use to evaluate that market performance.
[06:43] John Anderson
And either we find out that, yeah, this market is prices are doing what economic theory says they should do in response to new information or they’re not. And if they’re not, then there’s more work to be done, right? Why not? What’s wrong Is there is there a market structure issue there? Is there is there an exercise of market power?
[07:02] John Anderson
Is there is there a deficiency in the information that’s coming out? Is there a lack of communication there? What is the problem if that performance doesn’t match what we know from, you know, really heavily validated theory ought to happen? Is that a fair summary?
[07:20] Andy McKenzie
I think that’s a very fair summary. And, you know, I’m going to talk just a little before we get into our own research. I’ve just read a book by Scott Irwin, who’s a good friend and a good colleague at the University of Illinois, and he’s just brought out this book called “Back to the Futures”. Yeah, nice title, right?
[07:37] John Anderson
Yeah, that’s great. I wonder if he’ll be sued over that. I’m sure he talked to a lawyer before he came up with that.
[07:44] Andy McKenzie
It’s a fascinating read. But, you know, he talks about a lot of his research and a lot of it has to do again with what we’re just talking about.
[07:51] John Anderson
Scott’s done a lot of this like the literature we mentioned, Scott is responsible for a lot of that.
[07:55] Andy McKenzie
Yeah, really. And, you know, there’s a huge question mark about back in the 2007, 2008 period when prices were spiking up. Were these commodity prices being driven up by speculators or not? And Scott, you know, did a lot of research to show that it wasn’t speculators that were doing this. It’s just a fundamental supply and demand information that was driving up prices.
[08:18] Andy McKenzie
But a lot of people at the time were blaming speculators, the bad guys, for driving prices up.
[08:24] John Anderson
And that was an unprecedented time. That was unprecedented behavior in a lot of these markets. And there was and again, I think that work that Scott did was very good. And why Sanders was involved, a lot of that work was Scott’s former student, who’s at Southern Illinois. There was a great service to be provided by the profession in looking at that, because there was a tremendous amount of churn in the fundamentals of that market.
[08:50] John Anderson
But there also was a lot going on with changes in the way markets were being traded, changes and things like the frequency of trading and the level of dollars that were coming in from outside funds. And there was a lot of passive investment that was a new thing. And so, there wasn’t a lot to sort out there.
[09:08] John Anderson
And Scott really did a lot of that. He did a great service, I think, to help sort that out.
[09:13] Andy McKenzie
And, you know, you’re familiar with this being you know, having worked in DC before, you were with all the lobbyists always trying to do things. And so, it was a lot of pressure at the time on the politicians to increase regulation on the futures markets and sort of, you know, prevent speculators having too large of positions and so forth.
[09:33] Andy McKenzie
And I think like Scott made the point really that would have been detrimental to the markets performance because it would have just reduced liquidity and prices wouldn’t have been discovered as efficiently if those regulations had got into being.
[09:47] John Anderson
And that’s, you know, the challenge with political solutions is that they often don’t wait for the research to be done before they think they know the answer. And that’s a real risk. And that and I say that to really highlight the sense of urgency that there was around that work at the time. Like we really needed to know because we were going to pull the trigger on possibly some interventions that would have one, probably been detrimental to the behavior markets, but two probably wouldn’t have addressed the problem effectively anyway.
[10:18] John Anderson
And so, yeah, that was an exciting time to be working in policy and in markets both.
[10:25] Andy McKenzie
Yeah, no for sure. And then related to that as well, Scott always also looked at a period when we had this non convergence occur between futures and cash markets.
[10:35] John Anderson
Yes, big deal in the wheat market, particularly, but in fact in several other markets but massively important in the wheat market and the huge agitation for political intervention in those markets.
[10:46] Andy McKenzie
And he was able with other colleagues as well to sort of tease out the fact that it was really to do with the contract design that that non convergence was the issue.
[10:57] John Anderson
Delivery certificates were a big deal in that.
[10:59] Andy McKenzie
Big issue there. Sorry that the CME had not changed the storage rate either for a number of years. And so I don’t want to get into details on that but that sort of created this divergence between cash and futures prices at delivery time.
[11:15] John Anderson
Yeah. Well, you and I have talked we want to have Scott on the podcast sometime to tell these war stories and to talk about his book, so hopefully we can pull that off. But in the meantime, Andy, give us a little bit, maybe a little bit more of the flavor of some of the results of these advanced studies, some of the major kind of the big blocks in that literature.
[11:33] John Anderson
What’s the common theme if there is one in that work?
[11:36] Andy McKenzie
Yeah. So, I mean, again, its prices move when there is news hitting the market, something that wasn’t previously known and so that’s what adjusts the prices. And so, I’ve done a lot of work looking at you know price reactions to these the release of these well I call these the WASD reports these World Ag Supply Demand reports and really what people are looking at in those reports is what is the ending stock number for a commodity.
[12:01] Andy McKenzie
So just to sort of reiterate or for those who aren’t aware of what that is, if you look at a crop year and typically for grains, it’s from September through to the following September, the next year, that’s the crop year. So, if you look at how much is produced sea of corn in a particular crop year, how much is carried over from the previous year, and then how much is actually used or eaten up basically during the year, whatever’s left, that’s your ending stock.
[12:28] Andy McKenzie
So, it’s sort of a reflection of scarcity in the marketplace. The balance of supply and demand, again, the lower ending stocks, the less corn there is on the marketplace. So that would under normal market conditions would be reflected in a higher price for corn. And vice versa. So again, that’s really why these things are so interesting to people who are trading these markets, because it shows where supply and demand is at any point in time.
[12:55] John Anderson
And so, they boil a great deal of information down to a very concise figure.
[12:58] Andy McKenzie
Right.
[12:59] John Anderson
And that’s very tradable information.
[13:01] Andy McKenzie
And as we’re seeing, it’s really to what extent did the market already project the ending stock numbers to be at a certain number versus what the US government releases them to be? And that’s the key. And, you know, when there’s more supply than was expected, prices tend to go down and vice versa. So that’s what we tend to see.
[13:22] Andy McKenzie
And you know, we’ve done a number of studies as a number of other people have in the literature, and this seems to be a consistent theme that the markets react to this sort of news or information.
[13:33] John Anderson
And they react quickly. They do vary. The length of time for reaction is another important component of this work.
[13:39] Andy McKenzie
Yeah, I think Phil Garcia, again, another colleague who’s now retired out of Illinois, he showed that for these sorts of was the reports. I believe that the market digested that information and traded on it within the first 5 minutes of the release of the reports. So, you would see prices jumping all over the place for 5 minutes and then it would settle down.
[13:59] John Anderson
Which relates very much to the efficiency of the market. That’s an economist is going to think immediately of efficiency. How quickly does that new information become incorporated into those prices?
[14:09] Andy McKenzie
Yeah, and so Mike German myself and Mike Thompson, we looked at the release of the October was the report at one point. And the reason why we looked at the October one was that if you remember, but I guess back in 2013 there was a government shutdown, so there was no release of the WASD in that in that year in October.
[14:29] Andy McKenzie
So, we’re looking at, you know, how much do markets typically move versus what happens when there isn’t a release.
[14:35] John Anderson
So, you had a natural experiment on the October report specifically.
[14:39] Andy McKenzie
Exactly. And what we saw, again, within the first couple of minutes, prices would tend to move. So, for corn nine to up to 9 to $0.10 and they could move as much as $0.20 on beans. So, there’s, you know, big price moves based on this information. If there is information in the report.
[14:58] John Anderson
If there is a discrepancy between expectations and report exactly.
[15:03] Andy McKenzie
So, yeah, you can’t just look and say, okay, there’s a higher stock number now on this report. There’s definitely going to be lower prices. We had that discrepancy we would have to look at. Yes.
[15:13] John Anderson
Yeah. So, kind of transitioning that to some of the more recent research that we’ve been doing here in the Fryar Center. I should probably say that you’ve been doing. And our grad student, Will Johnson, we should give a shout out to Will here.
[15:28] Andy McKenzie
And Eunchun Park too. He’s also been a major player.
[15:31] John Anderson
Another colleague. So, this has kind of been a group effort. These events days were covered a lot of different reports cattle report, cattle on feed WASD report. There’s a lot of reports that come out from the government a lot of information provided by these reports. We have specifically been looking at export sales reports that come out on a weekly basis.
[15:53] John Anderson
So, tell us a little bit, Andy, about that work, kind of the design of the work that we’re doing and what we found in that work.
[16:01] Andy McKenzie
Yeah. Yeah. So Foreign Ag Service, we’re very interested in seeing to what extent I think in particular China could move the marketplace when it buys a lot of our corn or beans or whatever.
[16:15] John Anderson
So specifically looking at large purchase reports.
[16:19] Andy McKenzie
Large purchases, yeah. So, as you alluded to, John, there’s a thing called the Export Sale report and it actually takes two forms. So one that you mentioned is a weekly release and it aggregates all of our exports by commodity and where it’s going to over the previous week. And just reports.
[16:36] John Anderson
Just to interject here, when somebody is looking at weekly export sales data for a commodity, that’s probably what they’re looking at, taking somebody’s summary of that weekly ESR date export sales report data.
[16:46] Andy McKenzie
That exactly right. And people have looked to see whether markets move when that report is released in the past. And another one of our friends Wade Brorsen and he looked at this.
[16:58] John Anderson
Oklahoma State.
[16:58] Andy McKenzie
Oklahoma state and this was a while back, but Wade basically found there was no significant price reactions to the release of that report. So, again, that would go back to what we were saying. Right. The market’s already sort of priced that information in. So, it wasn’t a surprise. It wasn’t news.
[17:14] John Anderson
But enough people know about this or have anticipated this, that it’s been kind of traded into the market already.
[17:19] Andy McKenzie
Exactly. Exactly. So, you know, that’s one form, but another form is what are called these large export sales. And what FAS or
Foreign Ag Service defines them to be is the sale of any one commodity in any one given day to any one country destination where the sale is in excess of 100,000 metric tons. So that is a large amount of corn beans, right?
[17:47] John Anderson
Yes.
[17:48] Andy McKenzie
And so when those things happen and they don’t happen every day, right. Then the question is, do they move markets? Right. The prices react to that information. So that’s what we were tasked with trying to find out.
[18:01] John Anderson
So, to be clear, for the people listening to this, you’ve got the export sales report that comes out weekly. That is an accumulation of export sales for the week. There’s obviously a lag from when a sale happens to when that report comes out. So, in the case of a large sale, USDA has this mechanism that those are reported more immediately, those are made public more immediately, so that we’re not waiting on that weekly report for that information.
[18:33] Andy McKenzie
That is correct. And I guess, immediately is a relative term.
[18:36] John Anderson
Well, yeah. Okay, then that’s an important point. Thank you.
[18:40] John Anderson
Yes. We are more immediate than the weekly report but not immediately when that sale happens. So, get into that a little bit, because that’s a key part of the research.
[18:50] Andy McKenzie
Yes. I’m going to I’ll get into that. I think just to provide a little historical context why we even care about these reports. I think it would be good to talk about that. So, these reports were actually born or introduced back in 1973.
[19:05] John Anderson
And it’s a key year for anybody who follows commodity markets.
[19:08] Andy McKenzie
And so, what induced the US government to start producing, compiling and releasing these reports was there was something called the Great Grain Robbery, which took place in the early seventies, and that was when the former Soviet Union came into the U.S. markets and bought something like 10 million metric tons of U.S. grain, depleting basically supplies in the U.S. of those grains and causing huge price spikes and market disruptions.
[19:39] Andy McKenzie
So, you know, in the wake of these big market disruptions, which may be good for some people, that the price spikes up, but not for others. Right. The Foreign Ag Service decided it would probably be prudent to monitor how much is being sold and where it’s being sold about commodities on a weekly basis or through these large sale reports as well.
[20:01] Andy McKenzie
So that was sort of a monitoring tracking service to see is something bad coming down the road. Are we going to have market disruptions again? So that’s sort of where we’re going. And in the context of our research is, is China doing something similar to what the former Soviet Union did? And, you know, really what was driving this in the last three years, China was coming in and buying as much as 2 million metric tons of corn sporadically and, you know, unpredictably over the last three years.
[20:32] John Anderson
Two million metric tons in individual purchases. 2 million metric tons at a time.
[20:36] Andy McKenzie
Yes. And individual purchases. And so, to put this into context, if you look at ending stocks on corn, 2 million metric tons would be about 7% of ending stocks. So, these are not insignificant amounts of trade that are going on here. And you would expect them to move markets. Right? So just to give you a little mechanism on how this whole thing on the reporting side works, when a U.S. grain firm makes a sale to a foreign entity like some like maybe the Chinese government or whoever, then they have to report that sale.
[21:12] Andy McKenzie
If it’s over 100,000 metric tons by 3 p.m. Eastern Time, the next business day.
[21:19] John Anderson
Okay.
[21:19] Andy McKenzie
Then one day later again, the Foreign Ag Service releases it to the market in the form of one of these reports that at 8 a.m. Central Time. Now there’s almost like a two-day lag going on here. Still so many of, you know, potential trading that could take place even before these things are released.
[21:43] Andy McKenzie
So, the question again is, is it already priced into the marketplace or not? And that’s the interesting question again.
[21:49] John Anderson
So, somebody who knows this purchase is going to take place. Obviously, that’s private information. Somebody has that information that’s tradable.
[21:59] Andy McKenzie
Hmm.
[22:00] John Anderson
Then the deal takes place. It’s not fully released potentially for two days. So, you’ve got two days where that information could be potentially leaking its way into the market somehow through some mechanism.
[22:16] Andy McKenzie
That’s correct. So, then the question would be, would we see any price reaction at all when the actual official things released? And I guess we would expect because these are sort of shocks to the market in a sense, other than if somebody already knows about them like he was talking about. But they’re not scheduled events. So, we don’t really know when they’re going to occur.
[22:37] Andy McKenzie
So in that sense, there are maybe more of a surprise than, say, some similar reports which are scheduled things.
[22:44] John Anderson
Right. Well, like we know there’s a weekly export sales report. We know when it’s going to come out. It drops the same time every week. These are different.
[22:52] Andy McKenzie

Yeah. It’s not like you’ve got a bunch of private analysts projecting a forecasting what these things are going to do because you don’t know when they’re going to occur.
[22:57] John Anderson
Right.
[22:59] Andy McKenzie
So, in that sense, you might think they would move markets again, right? Because that’s news hitting the market. So, one thing that we decided to do is we try to find out the immediate price reaction, because, again, based on Garcia’s work, we know that the futures markets respond and trade this information very, very quickly. So, we wanted to get to the closest time period when these things were released and when the market’s trading right.
[23:28] Andy McKenzie
So coincidentally, because these things are released at 8 a.m. Central Time, the futures market trades overnight and then close at 7:45 and then it reopens again at 8:30 in the morning. So, these things are sort of released in a little vacuum or a window where no trading is taking place.
[23:49] John Anderson
They’re dropping into that fairly small time period of the day when we’re not trading.
[23:53] Andy McKenzie
Exactly. So, we thought it would be interesting to look at the change in the price from about 7:45 close to the 8:30 opening. And see if we track every time one of these things are released, what do prices do in terms of the change in the price between those two time periods? And then we simply average across all of these releases to see what the average price reaction is and see if it’s significant or not.
[24:21] Andy McKenzie
So that’s the basis of the whole study. That’s the impetus behind it.
[24:25] John Anderson
So, a fairly conventional event study design with the noticeable difference that you don’t have that expectation component.
[24:36] Andy McKenzie
That’s right.
[24:37] John Anderson
As formerly embedded in the in the system as it is for a big report like WASD.
[24:43] Andy McKenzie
That’s right. And, you know, we also looked at like the day before these things were released and the day after to see if there were any sort of, you know, unusual price movements going on there. And it’s a sort of a benchmark to see just how much the prices move when these things are released versus when they’re not.
[25:00] John Anderson
So, tell us what we found.
[25:02] Andy McKenzie
So, what we found was and I think this is fairly strong evidence that if you have a very, very large sale and I’m talking over one and a half million metric tons up to just over 2 million, and typically that’s going to be to China, because that’s the big player in the game.
[25:22] John Anderson
Yeah who else need to buy that much at one time or needs to?
[25:24] Andy McKenzie
I mean Mexico sometimes has that magnitude on corn that they’re buying. Incidentally we didn’t really see the same price reaction for Mexico, but we did see a price increase, a fairly large price increase when we had these large corn sales to China. And so, what do I mean by large? Well, putting it in the context of, you know, current prices, it was probably if you got over one and a half million metric ton sale, it could move markets as much as 4 to 5 cents a bushel.
[25:54] Andy McKenzie
So not quite as much as what we were talking on the WASD October release, which was maybe twice as much, but still, you know, not nothing right. Soybeans we didn’t really see the same level of reaction at all, maybe 1 to 2 cents for a very large sale. And if you’re just at the bare minimum of when these things after we reported 100,000 metric tons, really not much reaction at all, maybe half a cent, quarter a cent per bushel, at most.
[26:22] John Anderson
Okay.
[26:22] Andy McKenzie
So that’s sort of what we found. So, I think we can say that it seems that there is something with China itself, but that’s sort of hard to tease out too, because it’s the size of the sale that matters. And the fact that China is really the only one in the game who’s doing sales of that size, this sort of to us somewhat intertwined.
[26:43] Andy McKenzie
Right. But that’s what we’re finding. So, we do find a reaction there, which is interesting, I think.
[26:48] John Anderson
Right. Right. So, if the fact that there is a reaction suggests that this report is news to the market. Right. It has not all been traded into the market prior to the release of the report.
[27:02] Andy McKenzie
That’s right. And what was interesting to me is that the direction was, on average always positive up. So, it’s an increase in the price.
[27:11] John Anderson
And that would be by definition, these are always positive shocks. Right?
[27:14] Andy McKenzie
Exactly. So, it’s a positive shock because it’s increased demand in the fact. And so, you know, again, the futures markets are reacting the way we would expect. And again, this these 4 to 5 cent moves, it’s gone within 2 to 3 minutes on the trading. So again, it’s very, very quick adjustment.
[27:32] John Anderson
Right. Right. Which I think is consistent with previous studies on these futures markets. They are very efficient at assimilating information.
[27:39] Andy McKenzie
Yeah. And again, I go back to the fact is, why do we even care about this? Well, I think, you know, from a price discovery point of view, it’s important to see that the futures market is behaving the way we would hope it would and moving prices in the direction that reflects supply and demand. In other words, getting used to a fair price right.
[27:58] Andy McKenzie
That’s what we want. Everybody wants a fair price to trade on.
[28:01] John Anderson
Right. Right. And related to that, I mean, we’ve done this work, really this project came to us at the request of FAS, Foreign Ag Service, interested in this. You know, we’re market guys. We want to know if the market’s working. You know FAS is a policy organization from their standpoint they want to know that the mechanism they’re using to release information is not itself affecting the market, right?
[28:27] John Anderson]
We want the information to affect the market, but we want the mechanism to be basically transparent. We don’t want the timing of the release or who has access to the information. We don’t want those factors to be what drives the market. And so, there’s a really important policy component to this is the way we’re releasing information, the best way to do it.
[28:51] Andy McKenzie
Yes.
[28:51] John Anderson
In terms of how the reports put together, when it’s released, who has access to it, all those sorts of things. Those are all policy questions. And so, from FAS standpoint, it’s can we do this in a way that is beneficial in terms of getting information to the market but not distorting in terms of how it’s happening? So that’s a really important issue because we, you know, we started talking about some of the stuff that Scott did back in ‘07- ‘08.
[29:16] John Anderson
You know, we don’t want policy interventions to be what drives the market. And the release of public information is a policy intervention. Right? We we’ve made a conscious decision that there will be public provision of this information so that everybody has access to it. It’s a you know, it’s a benefit to price discovery. How’s that policy work out?
[29:37] John Anderson
Is it doing its job right? So, I think at that policy angle is something that’s easy for guys like us to overlook, but that’s critically important from the standpoint of this work and why it’s important.
[29:47] Andy McKenzie
I think you give an excellent point, John, and that is a critical component of this and something that obviously I think FAS were interested in. And as well, you know, from another policy point of view, I think we can safely say, although China potentially is moving markets to some extent, not to the same level as what the former Soviet Union did back in ‘73.
[30:10] Andy McKenzie
And so, I don’t want to demonize anybody too badly here. And but again, that’s another policy angle on this. Do we worry about a specific country or not?
[30:19] John Anderson
So yeah, no, and that’s a good point. And, you know, the Great Grain Robbery is an infamous episode in market history. And a footnote to what you were talking about earlier, we have the World Ag Outlook Board because of the Great Grain Robbery that organization within USDA, within the office of the chief economist was founded in the wake of that so that we would know what the global situation is and not get caught flat footed.
[30:48] John Anderson
We had no idea the Soviets were that short because we didn’t have the market intelligence to know. And so, World Ag Outlook Board is an outgrowth of that event. So, there were massive policy changes in response to that. And, you know, most of the things that we’ve done, I think since then comparatively at least, have been fairly minor tweaks.
[31:05] John Anderson
But we do tweak these things a lot. The timing of release, that’s something that changes from time to time, the day of release, what reports are provided, you know, we’ve gone back and forth sometimes on the June cattle report. You know, there was a what time when we dropped the June cattle report because we decided we didn’t need to say we, USDA decided there wasn’t enough in that to justify and they brought it back because the market kind of missed that information.
[31:31] John Anderson
So, there are a lot of policy questions embedded in this issue of how do markets respond when these reports hit? And it’s been fun, I think, for us to be involved in that.
[31:41] Andy McKenzie
Yeah, no. And I think another critical thing as well is if you think about use of government resources, think about how much money government money goes into compiling these reports, creating the statistics on them and so forth, it’s good to know that they can move market and so they have some value to them. There’s some reason why we’re doing this.
[32:02] Andy McKenzie
You know.
[32:02] John Anderson
That’s right. By the same token, and I think that’s a great point, we do devote a lot of resources to this. The level of resources we devote to the reporting is pretty small compared to the level of resources that are that are traded on this information. So, in terms of leverage, there’s a lot of leverage in that and in that investment, that public investment.
[32:22] Andy McKenzie
And, you know, I would argue I’ve looked at, you know, can there be new futures contracts developed? And currently I’m looking at could there be a rice futures contract in Asia? And one of the things I think in US markets that make these things function and work well is that the futures markets in the U.S. are able to trade on these on this information, which is visible.
[32:43] Andy McKenzie
I don’t think markets will trade in a vacuum. So, the fact the USDA compiles these reports makes it attractive not just for hedges, but for speculators to enter the marketplace and trade, and that gives liquidity to the market place.
[32:58] John Anderson
That’s a fantastic point. And I think that’s something honestly, we’ve had this system or some version of this system in place in for so long in the U.S. we kind of take that for granted. But if the only information is private, trading reveals private information. So, I’m going to be very reluctant to trade if I’m sitting on really valuable private information.
[33:19] John Anderson
But if there’s a public source out there that’s getting this out, I’m going to have to engage like I’m going to engage. I think that plays a huge role in drawing activity into the market. And you’re right, that liquidity is what makes markets work for people who need to use these for we’ve talked about price discovery, the other major function, risk transfer.
[33:39] John Anderson
So, our farmers who need to use these markets for risk transfer, that public information is hugely important, I think, in greasing the skids of having trading going on in that market so risk transfer actually works.
[33:51] Andy McKenzie
So, any time a hedger wants to get into a position, whether it’s long or short in the market, the fact that there is always somebody willing to take the other side of that deal who often as a speculator, yeah, that’s exactly the reason why it is you say it helps to grease the wheel on this thing.
[34:07] John Anderson
Yeah, absolutely. So, I think, again, I think that’s important to keep in mind. Just another wrinkle, I think, to the to the complexity of these markets, which again, I think a lot of people take for granted, even those of us who work with these markets a lot, you sort of take for granted that they just work because they work, but this is sort of an inheritance that we all benefit from that doesn’t exist on its own.
[34:31] John Anderson
It’s been built over a long period of time with a lot of hard work.
[34:34] Andy McKenzie
Yeah. I think you made the point before in discussions I’ve had with you, John, that really, you know, this price discovery or price transparency feature of futures markets is really a public good. Yes. But it’s really created by private traders or the private marketplace. And so, it’s interesting that we have a public good, which is provided by the private marketplace.
[34:53] Andy McKenzie
I think that’s an interesting feature of that.
[34:55] John Anderson
Absolutely fascinating. And I think that’s a kind of a genius of these markets in a way. And again, I think one that we’re very fortunate to have in this country and our markets. Part of what makes our markets, I think, the envy of the world in a lot of ways.
[35:09] Andy McKenzie
I think that’s 100% right. I’ve talked to industry folks and. We are I think in that sense, the envy of the rest of the world. Our margins can be so much smaller and everything, a whole supply chain, so much more efficient because the futures markets.
[35:24] John Anderson
Which ultimately benefits everybody who basically buys anything anywhere.
[35:29] Andy McKenzie
Yes, you may not think about it when you go to the grocery. It’s all part of it.
[35:32] John Anderson
It all adds up. So interesting topic, very interesting work, and something I think we’re happy to be part of and we’ll be putting out at least floating out into the peer reviewed world before too long and hoping for the best I guess, Andy.
[35:46] Andy McKenzie
Yeah, it’s always fingers crossed on that.
[35:48] John Anderson
That’s right. Well, we’ll get it out there for sure to our peers and which is kind of the gold standard in our world for that kind of information. So, we’re really excited about that work. Excited to share it with you on this podcast. And this has been the Relevant Risk podcast from the Fryar Center for Price Risk Management at the University of Arkansas.
[36:09] John Anderson
We appreciate you joining us.
[36:12] Intro/Outro
Thanks for listening to the Relevant Risk podcast, a production of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness within the University of Arkansas system. The Fryar Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural, Food and Life Sciences at the University of Arkansas in Fayetteville, and research and extension activities through the University of Arkansas System Division of Agriculture.
[36:39] Intro/Outro
Visit fryar-risk-center.uada.edu for more information. Thanks for listening.