Intercommodity effects of USDA announcements on market uncertainty

Abstract

This paper investigates the intercommodity effects of USDA's World Agricultural Supply and Demand Estimates (WASDE) and Cattle on Feed (COF) reports on market uncertainty, using implied volatility of one month synthetic at-the-money options. WASDE and COF reports are released monthly and provide fundamental information on grains and oilseeds and livestock markets. Prior studies have documented the reports' impact on price movements and their role in reducing uncertainty in the underlying commodity markets. However, limited attention has been given to how these reports influence market uncertainty across commodities. To address this gap, we utilize an event-study approach with t-test, Z-test, and nonparametric Wilcoxon test to assess whether USDA announcements reduce uncertainty in agricultural markets. Additionally, we estimate OLS regression to examine whether the unexpected components of USDA announcements affect changes in implied volatility related to those announcements. Our results show that implied volatility declines on WASDE announcement days for corn and soybeans, with bullish surprises influencing the corresponding change in implied volatility. We also find that the implied volatility for live cattle and feeder cattle decreases on WASDE announcement day while no pronounced effect is observed for lean hogs. These results provide evidence of intercommodity effects, where USDA announcements in input markets (corn and soybeans) influence market uncertainty in related livestock markets.