Why do agricultural products always take people by surprise?

Agricultural products have become the recent market focus: not only the farmers' market, but also Wall Street.

Since August, in the vegetable markets so closely tied to people's daily lives, many residents have found vegetable prices soaring. Round eggplants have turned into “gold ingots,” cucumbers into “golden melons,” and even cabbage is no longer at a “cabbage price.” They had originally planned to wait a while longer, but later realized that if they thought that way, they would have no chance to eat.

Also in August, in the volatile commodities market, many traders confidently placed their positions betting on higher agricultural prices, because satellite imagery indicated that a reduction in U.S. agricultural output was “all but certain.” However, the bulls who quietly awaited the “authoritative” guidance of the U.S. Department of Agriculture (USDA) report not only failed to get the “last straw” that would crush the bears, but even suffered heavy losses in the “largest historical deviation” of the USDA monthly report.

Why does the agricultural products market take both ordinary shoppers and traders by surprise? Is it because of the USDA's unpredictability and “unfathomable depths,” or because of the mischievous “meddling” of the El Niño “Bruce Lee”?

Agricultural Products: Taking Both the Farmers' Market and Wall Street by Surprise

“These round eggplants are as expensive as gold ingots!” In mid-August, at a farmers' market in Beijing, resident Ms. Wu told reporters that the recent price of round eggplants had shocked her greatly. “In July, a jin cost less than 1 yuan, and within a few days it rose to 2 yuan. I'll wait until it gets cheaper before eating it.”

However, Ms. Wu found that if she waited for everything to get cheaper before eating, there would be many vegetables she would never eat. Entering August, the prices of many vegetables rose sharply. For example, compared with prices at the end of July, pole beans rose by 1.5 yuan per jin, baby bok choy doubled in price, and cucumbers transformed into “golden melons.”

Data show that on August 7, the weighted average price of vegetables at the Xinfadi market was 2.60 yuan/kg, up 9.24% from 2.38 yuan/kg on July 31; up 61.49% from 1.61 yuan/kg in the same period last year. The week-on-week increase was notable, and the year-on-year increase was even more astonishing.

The rise in vegetable prices was also reflected in the Consumer Price Index (CPI). On August 9, the latest data released by the National Bureau of Statistics showed that in July, the price of fresh vegetables rose 10.5% year on year, with the increase closely trailing this round's CPI “leader”: pork prices.

In fact, the recent changes in agricultural product prices not only confused residents in the farmers' market, but also took agricultural product traders in the capital market by surprise.

Since August, many traders had placed positions betting on higher agricultural product prices, because earlier satellite imagery data all pointed to a reduction in U.S. agricultural output being “all but certain.” At the time, daily infrared images sent back by satellite indicated that precipitation in the U.S. Midwest from June to early July had been excessively abundant, which would lead to lower corn and soybean yields.

Most relevant institutions also unanimously agreed that U.S. agricultural products faced yield-reduction pressure this year. According to foreign media reports, Descartes Labs, a company providing agricultural satellite remote sensing data analysis services, estimated based on satellite images that U.S. corn production this year would be 13.34 billion bushels, down 6.4% from last year and below the 13.53 billion bushels estimated by the USDA last month. Los Alamos estimated that U.S. corn yield would be 164.9 bushels per acre, below last month's expectation of 168 bushels and also below the USDA's last-month expectation of 166.8 bushels.

August 12 was the date for the release of the USDA report. Before the “decisive battle,” traders confidently awaited this most “authoritative” report to conclude that output had declined and to deal the “last straw” to the barely breathing bears.

However, as soon as the USDA report came out that day, the bull traders went crazy. In its August World Agricultural Supply and Demand Estimates (WASDE) report, the USDA very unexpectedly raised its agricultural production forecasts, and the expected values exceeded market forecasts: it estimated that U.S. corn production in 2015/2016 would be 13.686 billion bushels, the third-highest in history, with yield reaching 168.8 bushels per acre; it estimated that U.S. soybean production in 2015/2016 would be 3.916 billion bushels, higher than the 3.885 billion bushels forecast in July, but lower than 3.969 billion bushels last year.

“This result was not only far below the forecasts of most institutions, but also close to the low end of market forecasts. This USDA report was the largest deviation in the history of USDA monthly reports (between USDA report estimates and the market average estimate). This is almost an indisputable fact,” an industry insider said.

This “blow to the head” brought great shock to the capital market. That day, the most actively traded December corn contract on the Chicago Board of Trade (CBOT) closed at $3.68 per bushel, down 19.5 cents, or 5.03%, from the previous trading day; the September wheat contract closed at $4.9225 per bushel, down 15 cents, or 2.96%, from the previous trading day; the November soybean contract closed at $9.1 per bushel, down 61.5 cents, or 6.33%, from the previous trading day.

The domestic futures market also fell rapidly, and spot soybean meal also dropped sharply in line with the market. In major coastal port areas, soybean meal prices were lowered to 2,700-2,800 yuan/ton, a decline of 30-100 yuan/ton, and bulls suffered heavy losses.