USDA's Short-Term Commodity Forecasts and Baseline - Research

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USDA's Short-Term Commodity Forecasts and Baseline - Research Powered By Docstoc
by Gerald A. Bange, Chairperson, World Agricultural Outlook Board, Office of the Chief
Economist, U.S. Department of Agriculture

BEFORE ADDRESSING SHORT- AND LONG-TERM FACTORS in the price and income outlook, I
would like to briefly describe the functions of the World Agricultural Outlook Board (WAOB) to
indicate the process through which the forecasts are derived.

WAOB Process

      WAOB chairs USDA’s Interagency Commodity Estimates Committees (ICECs and the
       Interagency Agricultural Projections Committee (IAPC). The ICECs develop official
       forecasts of short-term commodity supply and demand, while the IAPC prepares USDA’s
       long-term "baseline" projections. Short-term supply and demand forecasts are revised
       once a month and released in the World Agricultural Supply and Demand Estimates
       report. Long-term projections are released annually at USDA’s National Agricultural
       Outlook Forum.
      WAOB reviews and approves all "economic outlook" reports on domestic and world
       agriculture issued by USDA.
      WAOB operates an extensive world agricultural weather monitoring program. Weather
       analysts provided by the Department of Commerce work with USDA agricultural
       meteorologists to assess the impact of weather on global crop developments. WAOB also
       represents the U.S. government in the World Meteorological Organization.
      WAOB coordinates climate and remote sensing work among USDA agencies.

WAOB ensures that USDA estimates are unbiased, accurate, and reliable. USDA forecasts enjoy
a high level of public trust. While farmers or industry analysts at times question the accuracy of a
particular forecast, they do not doubt USDA’s objectivity or integrity. Each month, the domestic
Crop Production report and the monthly World Agricultural Supply and Demand Estimates
report are released simultaneously before U.S. commodity markets open. They are prepared for
public release under tight security to prevent any individual from obtaining advance knowledge
of market-sensitive information.

The Department of Agriculture goes to great lengths to make its reports available to all market
participants within minutes of release. In addition to releasing reports through news services,
USDA publishes them immediately on the Internet. WAOB’s mission is to provide timely,
objective, and reliable information to all market participants, from the smallest to the largest.
Preparation of the World Agricultural Supply and Demand Estimates

The process used by USDA to make supply and demand estimates differs from that used for
domestic crop production forecasts. Domestic forecasts are based on surveys of farmers and on
examination of crops in the field. Estimating crop production for foreign countries often involves
greater subjectivity because objective farm surveys or other "ground truths" may not be available.
And, forecasting how available supplies will be allocated between domestic use, trade, and
stocks in more than 100 countries also entails considerable economic analysis and judgment.

Several features of the process used to derive supply and demand estimates help compensate for
the paucity of foreign forecast data. All available information sources are compared. USDA’s
own resources include weather analysis, country reports from our agricultural attachJ s abroad,
and evidence from satellite imagery. In addition, private and public information sources are
considered. This broad information base is reviewed by analysts from several agencies who bring
diverse expertise and points of view to bear. To arrive at consensus forecasts, alternative
assessments of domestic and foreign supply and use are vetted at meetings of Interagency
Commodity Estimates Committees convened and chaired by WAOB. Throughout the growing
season and afterwards, estimates are compared with new information on production utilization,
and historical revisions are made as necessary.

Each month, USDA prepares the Crop Production report and the World Agricultural Supply and
Demand Estimates (WASDE) report at the same time, and releases them together at 8:30 in the
morning. This procedure allows the WASDE report to combine the latest crop forecasts for the
United States with updated USDA forecasts for other countries.

The Balance Sheet Concept

USDA supply and demand estimates reflect a full balance sheet for each commodity and country.
Separate estimates are made for beginning stocks, imports, and prospective production to
determine the total supply of a crop that will be available for the new marketing year. The
demand side of the balance sheet reflects domestic use, exports, and ending stocks. The demand
side of the balance sheet may include a category for "residual" or "unaccounted" disappearance
to account for disappearance or usage that cannot be checked against another information source.
The balance sheet disciplines individual estimates: total supply must equal domestic use, plus
exports and ending stocks.

The process of forecasting price and balance sheet items is a complex one, involving the
interaction of expert judgment, commodity models, and in-depth research and analysis by
Department analysts on key domestic and international issues. Commodity models, together with
new research on commodity market issues, provide the framework for assessing the information.
For example, committee members use a variety of models developed by the Economic Research
Service and the Farm Service Agency to analyze the new crop information available each month.
Expert judgment then provides a reality check and evaluation of model results, and has the final
say in determining the Departmental estimates.
Critical supply and demand relationships change over time as policies and structure change. A
high-quality Departmental forecasting process requires a strong research program to ensure that
understanding of markets keeps up with changing conditions. For example, the 1996 Farm Act
has increased the responsiveness of planting decisions to changes in market prices. It has also
influenced how the market determines prices. USDA analysts are responsible for keeping the
Department’s information base and models current with changing market relationships.

Disposition between various domestic uses, exports, and ending stocks can be affected by
indications of changes in many factors. Such signals range from indications of livestock feeding
from the USDA Cattle on Feed report, to news of reduced crop prospects abroad, to regulatory
decisions and changing assumptions regarding the production and use of fuels made from corn.
Expected demand shifts between commodities and countries must be anticipated as price
relationships change. New developments in economic conditions, government policies, and
global politics also can alter prospects on either side of the equation.

Commodity and Country Coverage

USDA publishes separate balance sheets each month for a number of commodities and countries.
Separate U.S. and world balance sheets are published for wheat, coarse grains, corn, and rice.
Oilseed coverage includes U.S. and world soybeans, and world totals for aggregate oilseeds. The
report also forecasts U.S. and world cotton supply and demand. In addition, WASDE commodity
coverage extends to U.S. refined sugar production and use, and to U.S. supply, use, and prices
for meat, poultry, eggs, and milk.

This broad commodity coverage allows analysts to reconcile changes among commodity balance
sheets. Livestock production, for instance, has implications for corn demand and prices, which in
turn has an impact on use of competing feedstuffs, industrial use of corn, and potential exports.

The WASDE report publishes estimates for the United States, the world, and selected major
countries. For example, soybean supply and use is reported for the world, the United States,
China, the European Union, Argentina, and Brazil. However, in order to estimate world soybean
supply and demand, separate balances are prepared for 90 countries. This depth is crucial for
obtaining a true global picture of trade prospects and trends. For example, numerous small
changes in soybean crop prospects or import needs for relatively minor market participants can
negate or augment better-known developments in major countries.

Supply and demand estimates are forecast on a marketing-year basis. The marketing year for
each crop usually begins with the first month of harvesting, and thus can differ by country or
region for the same crop. USDA’s marketing year designation for a country may differ from the
one used locally, especially where crops such as rice are harvested year round.

Aggregate world supply and demand estimates represent the summation of numerous local
marketing years that stretch across many months. For a given year, aggregate world supply and
demand estimates represent a concept and not a world total at one point in time. For example, the
1999/2000 marketing year for U.S. corn began on September 1, 1999, and will end on August 31,
2000. The WASDE report also includes a forecast of corn supply and use for South Africa,
where the next local marketing year for that crop will extend from May 2000 through April 2001.
South Africa will ship most of its exports shortly after harvest in July-August 2000. Because this
corn will compete with U.S. corn harvested in the fall of 1999, USDA includes South Africa in
the world totals for 1999/2000.

The monthly release of the WASDE report is quickly followed by publication of more detailed
reports from the Economic Research Service and Foreign Agricultural Service. These reports are
consistent with estimates in the WASDE report and receive interagency clearance prior to release.
ERS "Situation and Outlook" reports analyze market prospects and developments, especially for
the United States. FAS circulars report supply and demand at the country level and focus on
international trade.

Foreign Production Estimates

Much of the strength in USDA’s forecasting program derives from the resources available for
making estimates of crops and use in other countries. FAS’s considerable information and
analytical resources begin with its agricultural attachJ s, who are located at U.S. embassies
abroad. AttachJ s survey current growing conditions, evaluate trade prospects, and maintain
contact with government and commercial sources.

In Washington, one set of FAS analysts uses reports from the attachJ s, weather data, and
analysis of satellite imagery to propose changes in foreign production estimates for interagency
review and clearance. Other analysts separately propose changes in foreign use and trade data.
This division of responsibilities provides a check and balance system to ensure accuracy and
integrity of crop production assessment in the supply and demand estimates. The process is
designed to ensure unbiased forecasts.

Analysis of satellite imagery enhances the accuracy and reliability of FAS assessments and
production estimates. The imagery is used to monitor the condition and expected yield of foreign
crops economically important to the United States, including wheat, coarse grains, rice, oilseeds,
and cotton. Satellite coverage is global and is adjusted throughout the year to focus on Northern
or Southern Hemisphere countries as the season dictates.

Official crop statistics of China and other nations, where available, are critical in forming current
estimates. But not all countries have crop-estimating agencies capable of making reliable, timely,
or objective production forecasts. Also, many major producing and trading countries do not
publish crop reports until well after the crop has been harvested. In the interim, USDA must rely
on the historical record compared with current conditions.

Preparation of Baseline Projections
Parallel to its oversight of USDA’s short-term forecasts, the WAOB chairs the Interagency
Agricultural Projections Committee, a group of experts, primarily from the Economic Research
Service. This committee is responsible for preparing the Department’s long-term agricultural
projections. Several USDA agencies collaborate on the committee. While this process can be
tedious, each agency contributes a unique understanding and perspective. This diversity of
knowledge helps us to ensure that all relevant information has been considered.

USDA’s long-term projections, originally used internally to prepare the federal budget, were
published for the first time in 1993, and are updated each year to reflect new data and changing
domestic and trade policies. The projections are intended to provide a neutral backdrop for
analysis of the impacts of alternative policies and of external developments. They do not attempt
to account for any shocks due to such factors as weather or business cycles. From a traditional
forecasting perspective, it is this "no shock" assumption which most differentiates the baseline
from a forecast.

It is important to be aware of the limitations of USDA’s baseline projections. Simply stated,
baseline projections are not "forecasts" in the traditional sense of the word, but rather a set of
long-term projections that reflect assumptions about the global economic outlook and current
agricultural policy. Few analysts, particularly those who worked on the baseline, would say with
great confidence what wheat prices will be nine years from now. Yet this number is in the
baseline. The important issue is what path wheat prices will follow over the next decade and
what they will be relative to prices of other commodities during this period.

If the scenario presented in the baseline is not a USDA forecast about the future, what exactly is
it? It is a conditional long-run scenario that describes the path the agricultural sector will take
given specific assumptions regarding the following:

      U.S. and foreign economic conditions
      U.S. and foreign agricultural policies
      Growth rates of agricultural productivity, both in the U.S. and abroad, and
      Weather—a "normal" weather scenario is assumed.

Changes in any of these assumptions could significantly alter the baseline projections.

How Are the Projections Used?

As an interagency product, the baseline projections are used by the Department of Agriculture
for a variety of purposes:

      To develop cost estimates for the President’s budget
      To analyze alternative policy scenarios
      To perform sensitivity analyses. For example, what would be the impact of China’s entry
       into the World Trade Organization?
Although the baseline projections are focused on the future of U.S. agriculture, they are
supported by considerable international analysis. Determining future trade prospects, which are
increasingly vital to the prosperity of U.S. farmers, requires making a broad range of
assumptions about global economics and international commodity markets. The Economic
Research Service of USDA publishes a companion report to the projections released in February
entitled "International Agricultural Baseline Projections." This report provides extensive analysis
on the international and country-level projections underlying the USDA baseline.

Because the projections are comprehensive, they may prove useful for a variety of planning
purposes. They can be used to anticipate

      Major forces and uncertainties affecting future agricultural market
      Prospects for global long-term economic growth, consumption, and trade
      Future price trends and trade flows for major farm commodities.

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