USDA announcements and changes in the release policy

Huang, Joshua

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https://hdl.handle.net/2142/115324 Copy

Description

Title

USDA announcements and changes in the release policy

Author(s)

Huang, Joshua

Issue Date

2022-01-13

Director of Research (if dissertation) or Advisor (if thesis)

Serra Devesa, Maria Teresa

Doctoral Committee Chair(s)

• Garcia, Philip
• Serra Devesa, Maria Teresa

Committee Member(s)

• Irwin, Scott H
• Hubbs, Todd

Department of Study

Agr & Consumer Economics

Discipline

Agricultural & Applied Econ

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• public agency announcements
• agricultural policy
• futures market
• information

Abstract

The United States Department of Agriculture (USDA) releases scheduled reports designed to provide key information on supply and demand for major agricultural commodities in the U.S. and the world. Traditionally, these reports have been closely followed by market participants and played a critical role in agricultural commodity pricing. The transition from the pit to the electronic futures markets has led to fundamental changes in how agricultural commodity markets trade public information and discover prices, which has implications for the speed of price discovery, the value of information, liquidity provision and costs and market advantage. This has challenged our knowledge on the matter and motivated scholars to bring new light to the field by improving on existing methods. This thesis contributes to the literature by assessing the value of USDA reports for grain markets under the new environment and the impacts of recent changes in the release policy. The thesis is organized into three essays all of which are framed in a microstructure context and use high-frequency data that reflect the temporal changes in market activity. The first essay studies the value that corn and soybean futures markets attribute to USDA reports, by calculating the profits that would accrue to hypothetical traders with advance access to the information before the reports become public. We use recently developed risk-adjusted profit measures and account for proliferation of private sources that compete with USDA in providing fundamental market information. Results show that USDA announcement surprises in the era of electronic trading have economic value which is subject to relatively small downside risk. In 2012, USDA began releasing crop reports during normal trading hours. Prior reports were released during a trading halt during which electronic platform traders competed in a batch auction for two hours. The second essay analyzes the impact that this change in release policy had on the corn futures market. Compared to the current real-time release policy, results show the batch auction reduced speed advantage, lowered market volatility and improved liquidity around report releases, at the cost of delaying price discovery. The results also support the argument that the development of a shorter batch auction could improve on the lengthy price discovery process while maintaining the batch auction’s other advantages. Prior to August 2018, USDA released its reports after an internal lockup procedure involving news media to assist with information dissemination. However, news media were found to transmit information faster than the time required by USDA to post its reports online. This may have provided market advantage to specific news media clients equipped with low-latency technologies, and prompted USDA to end news media access to the lockup. The third essay assesses whether this policy change has altered low-latency traders’ (LLTs) market advantage around the release of USDA reports in corn and soybean futures markets. Findings show no evidence that this policy change affected aggressive LLTs’ trading profits. The estimated profits are non-trivial and can be earned quickly. While the policy change had only limited effect on LLT profits, it coincided with more pervasive delays in the release of market information likely caused by server congestion or related accessibility issues. USDA investments in information dissemination may be warranted. In sum, in the era of electronic trading where speed confers market advantage, USDA reports continue to be valuable and their information is incorporated faster into the price, at the cost of reduced market quality and a re-distribution of economic rents that essentially benefits LLTs.

Graduation Semester

2022-05

Type of Resource

Thesis

Copyright and License Information

Copyright 2022 Joshua Huang

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