Market Matters Blog
Darin Newsom DTN Senior Analyst

Tuesday 07/22/14

Imaginary Numbers

The soybean market is still reeling from USDA's July 11 supply and demand report where soybean ending stocks for 2013-2014 were increased to 140 mb, due to a reduction of residual use to a minus 69 million bushels. Maybe you are asking yourself: How can a demand category can possibly be negative?

As DTN Markets Editor Katie's article "The Root of Residual," states, a negative residual use number isn't anything new. In fact, I remember working with her predecessor Pat Hill on a similar article back in 2007, the last time USDA played this powerful wildcard.

It should come as no surprise that I disagree with this practice and here I provide a point-by-point counter argument to USDA's explanation contained in Katie's article. I seriously question the process USDA follows.

The piece states that residual is a statistics term, a numeric value that represents how far off your original predictions were. This includes the abstract (another fun math term) "discrepancies in measurement." Again, the idea that USDA, or anyone, knows how many bushels (tons) are actually produced, used, and left over is a fallacy. It's all estimates built on estimates, with things like residual use making up the difference.

For now I'll leave the assertion that the hilarity that is corn quarterly stocks can somehow be tied to the inability to reconcile its balance sheet alone, except for the comment "counting new-crop as old-crop."

The crux of the matter is that the National Agricultural Statistical Service seems to have an interesting equation. In the piece it states this formula: Supplies - Use - X (residual use) = Ending stocks. With it being stated that residual use is the ONLY variable, the conclusion is that ending stocks are assumed before all demand can be subtracted. In times when supplies don't seem to be there, that means residual use has to be dropped into negative territory to maintain the expected ending stocks figure.

I wish I could do my accounting that way. I would estimate my life savings considerably higher, then create a debit category that can be negative to make it a "reality." That would be fun right up to the point of another powerful government agency telling me it isn't exactly legal, with penalties soon to follow.

I find it interesting that toward the end of the piece USDA says domestic soybean ending stocks-to-use hasn't fallen below that magical 4.5% level -- until now. But, given the open-ended system of accounting USDA has at its disposal, don't be surprised if enough 2013 bushels are eventually found to bring us back to this imaginary floor (the July ending stocks-to-use figure was 4.1%).

Why the false floor in soybean ending stocks to use? It's simple: What would happen if the world's largest buyer of soybeans was told supplies might not be available to meet demand? And that your largest competitor has boatloads of them ready to move?

I could go on forever. The bottom line is as it always has been: These reports are unnecessary up until the point that all the variables, including residual use, have been given a value. In other words, there is no need for the monthly volatility created by USDA, NASS, and WOAB guessing at what the supply and demand situation is.

Come this October, when all the tallying has been done for the 2013-2014 marketing year (not the 2014 crop mind you), a single, final report should be released. The information would be outdated enough that the markets shouldn't react, but valuable enough for later study when analyzing past supply and demand issues.

That's it. One report that looks back rather than trying to project forward, and without the fanfare that surrounds what we see today.

But it will never happen. It will never be allowed to happen. Therefore imaginary numbers like soybean residual use will continue to cause havoc for U.S. (and global) producers.

(CZ)

Posted at 6:45AM CDT 07/22/14 by Darin Newsom
Comments (13)
Gee, what a spoil-sport you are! How could specs have fun in the market without monthly reports to play with!
Posted by LeeFarms at 7:25AM CDT 07/22/14
Good morning. I agree. After all, that's what these reports were initially intended to do, right?
Posted by DARIN NEWSOM at 7:48AM CDT 07/22/14
The real question is if the stocks do not exist, yet they are assumed to have existed before, then what of the farmer who "supposedly" produced said soybean. Is he or she then but a variable with the reality of their production(or lack thereof)neither confirmed nor believed. In other words Is this real life? Stephen
Posted by Unknown at 3:27PM CDT 07/22/14
Follow up comment If I assume that I have made money on the bean. But I spend it on something(old car maybe). I get to the end of the year and the money doesn't exist. Does the IRS have a negative residual for income Concerned Stephen Ellis
Posted by Unknown at 3:35PM CDT 07/22/14
Thought provoking questions Stephen. There is no such thing as a reality of production to be confirmed or believed when it comes to soybeans. That was one of the key points I took from Katie's article. So no, it is not real life. Is it tradeable information? Yes, and that is was keeps the system in place. As for your second comment, what I've heard from customers following the sell-off in grains is that the IRS better have an accounting for a negative residual income. Just kidding. As I said in the piece, it would be nice if I could do my books the way USDA is allowed. As always, thank you for your your comments.
Posted by DARIN NEWSOM at 4:09PM CDT 07/22/14
I do know some numbers of reality,95 degrees and no rain since the 25th 0f June.
Posted by Raymond Simpkins at 4:41PM CDT 07/22/14
Thank you for your comment Raymond. I agree, that is reality.
Posted by DARIN NEWSOM at 6:52PM CDT 07/22/14
no rain here since june 27th only irrigation making grain what a waste not likley to get money back or the water so under valued it is sad. traders knowlege is not there
Posted by andrew mohlman at 8:40AM CDT 07/23/14
are you crazy? how dare you question the usda and nass. they may put a hit on you darin there are some decent crops in se nd but right across the road from them will be a field that is 50% gone. you can then add in the fact that even the decent looking fields are 2 weeks behind, uneven and short. that doesn't get us close to a normal crop. we have decent moisture but the next 2 weeks call for below normal temps and below normal precip. not really a forecast to add bushels.
Posted by harlan deike at 9:48AM CDT 07/23/14
Only in the good 'ol USA could taxes be spent on such a useful service as "voodoo statistics"! We are so passive!
Posted by Roger Cooper at 12:12PM CDT 07/23/14
I have been threatend by NASS agents to fill out their surveys.We had one show up at the house at 5:30 in the morning and told me I had to fill it out now.Needless to say she has never been back. Then they sent another guy who was a pain in the rear, Now when we get them in the mail they go to the round file cabinet.Our information is only used against farmers anyway no matter what.
Posted by Raymond Simpkins at 7:53AM CDT 07/24/14
They say the Gulf Water is cold and that there will be no hurricanes in the Gulf. That is our late moisture. Our crops are hurting now, where are we going to get the moisture to make the crop that everyone is talking about?
Posted by Unknown at 8:11PM CDT 07/24/14
I'm with you, Ray!
Posted by Roger Cooper at 9:50AM CDT 07/27/14
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