1. Good morning! Want to start the week out by reviewing my #FDD from last week on USDA changes to the 2018/19 corn balance sheet. Here is the link to the article farmdocdaily.illinois.edu/2020/01/did-th… 
2. The changes to 18/19 corn balance sheet seem pretty small and not worth fussing about at first glance. Production down 80mb. Feed and residual down 186mb. Ending stocks up 107mb. Minor revisions to past data, right?
3. The problem with the USDA revisions for 2018/19 corn balance sheet are not the size of the changes but the methodology used to make them. A historic reversal I have never seen before.
4. Have to go back to a little grain marketing 101. A balance sheet is an accounting identity: Beginning Stocks + Production + Imports – Food, Seed, and Industrial Use – Exports – Feed and Residual Use – Ending Stocks = 0.
5. At the end of the marketing year we either have direct survey evidence or can estimate very closely all the components except feed and residual. The result is that feed and residual use is implied as shown here.
6. I like to think of the corn balance sheet as having "measured" and "unmeasured" components. Feed and residual use is the "unmeasured" component and that is why it has to be implied. No USDA feed survey is conducted.
7. With that background we can better understand the jarring nature of the 2018/19 changes to the corn balance sheet. Here is what USDA said in special note for quarterly Grain Stocks report. Second paragraphs is the key.
8. USDA/NASS said they reviewed the balance sheet and this led them to change stocks and production. I confirmed with NASS that the key variable was feed and residual use.
9. I don't know if USDA/NASS will ever admit it directly, but I think for whatever reason they did not like the apparent misalignment of 2018/19 corn feed and residual use with livestock numbers. So, they smoothed it as shown in this graph.
10. If you are not a balance sheet nerd you can reasonably ask why is this such a big deal? The reason is that NASS/USDA used the "unmeasured" feed and residual use estimate to make changes in the "measured" production and ending stocks for 2018/19.
11. I could have lived with this violation of basic balance sheet principles if the USDA had only changed production as a response to the feed and residual change. The real zinger is changing the ending stocks. Previously those numbers have been sacrosanct once published.
12. To add insult to injury, changing production and ending stock estimates based on a desired level of feed and residual sends a signal that the USDA has more faith in their ability to forecast feed and residual use than production and ending stocks. Huh???
13. So, the ball is back in the USDA 's court on this one. My personal plea is to have them just say no and never do this again. We have dealt with measurement errors in feed and residual use forever and we can continue to in the future. Don't mess with the other numbers!
