What does it mean when a USDA report is BULLISH or BEARISH for a commodity?
You hear it all the time in the industry, “The crop report is OUT! Everyone, it was a bullish report day for beans with yield at “insert yield here” and production at “insert reported production here.”
Here’s the problem.
If you’re not comfortable reading crop report results or familiar with what was reported in the previous report, that likely means nothing to you.
But these terms aren’t only used in relation to reports. Rather, “bullish” and “bearish” litter the commentary of most grain marketing publications day to day.
The thing is, there’s some sort of expectation that everyone knows what they mean. But, that’s not the case.
So today, that’s what I’m here to do for you!
Break it down.
Let’s start with bullish and what it means when you read that a report was “bullish.”
BULLISH Report: Report results were “better” compared to the last report, which usually means the market price for the commodity will likely respond by going up after the report.
An example of a bullish reported number would be if production or yield were lowered, or demand raised.
Why?
Typical supply & demand reasons. If your supply is reduced and demand stays the same, or is reported even higher, then the price will likely rise because more people are competing for a limited supply of the commodity.
Or, if demand rises or stays the same and your production is lowered, the balance sheet tightens and, again, it’s a bullish scenario for the commodity.
The caveat with price movement on report day?
If the reported number in a USDA crop report was fully expected by traders in the market, the price may not move much.
Or, in some cases the report will come out with bullish numbers, but not as bullish as the market expected. In that case, you likely will not see a rally in price. Actually, you might even see prices fall.
When analysts expect certain numbers, they have typically been making trades in the futures market based on their assumptions.
Thus, if the report comes out close to those expectations, even if it’s bullish compared to the last report, the market likely won’t move much because the market has already priced this move in through the trades made by the analysts.
When the report varies widely from expectations, now that’s when you see the most price movement.
So that’s a breakdown of what ‘bullish’ means.
Now, what about ‘bearish’?
BEARISH Report: Report results were “unfavorable” compared to the previous report, which usually means the market price for the commodity will likely respond by going down after the report. Anything that would cause additional bushels (supply) to be in the market is bearish.
Some examples include a decrease in demand, increase in production (i.e. a bumper crop year or more acres planted/harvested), or an increased reported yield number.
Similar to the bullish examples, if analysts are expecting a bearish report and reported numbers are similar their expectations, the market may not move much.
Why?
Because analysts make trades in the market according to their expectations.
If they expected a bearish report, they’ve already been making trades in accordance with that expectation.
However, if the reported numbers are MORE bearish than analyst expectations, that’s when the market tends to move more substantially downward.
Let’s work through a real world example to see if you are comfortable with ‘bullish’ and ‘bearish!’
The WASDE (World Agricultural Supply and Demand) report is coming out this Friday, January 10th.
Corn Production in December 2019 was reported at: 13,661 million bushels
Average Analyst Expectation prior to the release of the January 2020 report: 13,502 million bushels
QUESTION: Are analysts expecting the USDA to report a bullish or bearish production number for corn?
Answer: This would be considered a bullish expectation for production because a lower reported production number means that supply gets ‘tighter’.
Now, if demand stays the same or improves, that creates an overall bullish story for corn.
However, if demand is reduced as well, it can quickly turn into a bearish report as a whole depending on the reduction amount.
The important thing to remember is that even analysts don’t know what’s going to happen on report day.
That’s been proven time and time again, so don’t get too caught up in the expectations.
Most importantly, don’t try to out guess the reports or the market moves.
Instead, make sure your marketing plan is in a position you feel comfortable with if the market heads in either direction on report day.
Here’s to hoping for a bullish report day on Friday and a rally in the markets! 🙂