As millions of tonnes of grain are being reaped off paddocks, the harvest forecast chickens that were hatched over the last six months are coming home to roost. There are always surprises when the ultimate truth detector, the harvester, cuts its way into the paddock. Protein, screenings, frost damage, staining, weed seeds and so on – there is a profusion of yield and quality variables. You would think that forecasting the simplest, total tonnes would be easy, but it’s not.
If it's hard enough to guess correctly looking at a ripe crop, it is a fair indication of how hard it is to pick when plants are a few leaves tall – yet grain markets feast on such forecasts.
As this piece is written, markets have been moving on the state of northern hemisphere winter wheat crops before they move into dormancy. Not enough rain, too hot, too wet, all factors that can influence the plant’s relentless pursuit to reproduce by pumping out as many seeds as it can.
So how wrong do forecasters get it? A fair bit as it turns out. The average for July is a bit over +/- 20% ‘wrong’.
In the early stages, forecasts are based on hectares planted and typical yields give the planting scenario. If there were good summer rains allowing for knockdown and optimum establishment, then higher yields would be estimated compared to dry seeding in June.
But in the months that follow, trends are established and it's about adjusting course, based on rainfall (rain means grain), and the estimates swing around a lot, as seen in the chart below. Estimates are still quite wide in October and it's not until December that forecasts get to within an average of 5% of the final result. On an average of 20mt over the period analysed, that’s still 1 million tonnes swinging in the breeze.
WA is not an orphan with big swings, every major grain growing region is the same. So why does anyone bother if we get it so wrong? The point is not to be right but to play the odds.
If you are a speculator that lives and dies on beating the market, improving your chances a few percentage points makes a world of difference and, fundamental to that, is asymmetry of information.
For every person selling because they perceive that it’s good value, you need a buyer that is alternatively thinking the price is a good deal. If a seller can get an early view that there is more supply than the market is factoring in, then they will attempt to contract to someone who believes the opposite before the market catches on.
And this is where the magic of the market happens. If you are a buyer/seller, you don’t need estimates to be accurate! All you need is for the market sentiment to move in your direction relative to the position you are holding. It doesn’t matter what the final tonnages are as long as you have closed out your position for a profit which could be many months before (or after) the final results come in.
This is why every farmer and their dog has an opinion on how the season is faring. How many times have you heard a debate over noodle wheat hectares or canola yields compared to the public estimates?
Of course, little old WA is just one part of a complex global market of quality, commodity, location and timing (we don’t move the market that much) – but every piece of the jigsaw helps build the picture.
