Commodity Forecasting in the U.S. Department of Agriculture

1. Commodity Forecasting in the U.S. Department of Agriculture Presentation for Vietnamese Officials February 2006 William Hahn Senior Economist, Market and Trade Economics Economic Research Service, USDA

2. Overview • What are USDA’s goals in developing its commodity market forecasts? • What is USDA’s process for developing short-term (year ahead) forecasts? • What types of projections does USDA make for the longer-term? • Why does USDA develop forecasts?

3. Goals of USDA’s Outlook Program... • …To provide information, data, and analysis that: • Is insightful, objective, and available to all players in the market. • Reaches key users (both public and private) in a timely, easy-to-access fashion. • Enhances decisionmaking and relies on customer feedback. • Improves the transparency of markets and their interactions with policies and institutions.

4. Special Issues in AgricultureAffect Forecasting • In the U.S., government programs have historically had an impact on the sector. • Nature and biological cycles are important: • Biological production lags for livestock. • Annual production cycle for crops. • Demand is relatively inelastic compared to many non-agricultural commodities.

5. Short-Term Forecast for Porkfrom USDA’s “WASDE” Report

6. Interagency Committees Coordinate Agricultural Commodity Forecasts • Five USDA agencies develop these forecasts, which are coordinated by World Agricultural Outlook Board “committees” (wheat, rice, etc.). • Annual forecasts are developed monthly for: • Crops--Wheat, rice, feed grains, oilseeds, cotton, sugar. • Livestock--Meat animals, poultry, dairy. • “WASDE” is issued between the 8th and 12th of each month.

7. WAOB • Coordinate and document interagency review and clearance • Short-run modeling • Maintain detailed commodity specific data and economic parameters • NASS liaison • FAS • Foreign Market Intelligence • Global Supply / Demand • Trade Flows: Short-run • Export Sales • Trade Statistics • Trade Policy • FSA • U.S. Farm Program Participation • Program Decisions • Budget Liaison • Program Support • Mandatory Reports • AMS • Domestic Market Intelligence • Wholesale Prices • Warehouse Inventories • Shipments Data • Grain Inspections • Border Crossings • ERS • Objective Economic Analysis • Survey and Evaluation of Current Information • Trade Economics: Medium- and Long-run • Food, Seed, Industrial Use • NASS • Planting Intentions • Crop Condition Assessment • Production and Stocks Estimates • Season Average Prices • Inventory Numbers • Marketing and Slaughter Data Numerous Agencies Are Involved in Developing USDA Forecasts • INTERAGENCY COMMODITY • ESTIMATES COMMITTEES • Serve as focal point for USDA situation and outlook program • Bring all relevant expertise within Department to bear on commodity and sector situation and outlook assessments • Assimilate information and forecasts reflecting unique agency expertise • Construct consistent country. regional, and global supply and use estimates for Interagency review and approval • Assure objectivity of USDA economic assessments • Evaluate non-USDA analytical results and information sources • Achieve Department-wide consensus on current issues affecting commodity markets • Assure consistency among USDA published and internal estimates • Present analytical results to policymakers and others • JAWF • Weather Information • Weather and Crop Yield Assessments • Early Warnings

8. Two USDA Agencies in the Process Focus on Primary Data Collection • National Agricultural Statistics Service (NASS)— • Variables: Stocks, acreage, yields, production, prices received by farmers. • Extensive surveys of elevators, farmers, etc. • Staff at state offices interact with producers and industry. • Agricultural Marketing Service (AMS)— • Daily and weekly price reporting at selected markets. • Extensive field staff collect and report data. • Accounts for largest number of USDA market releases, but many are quite brief.

9. Three Other Agencies AlsoHave Unique Roles… • Farm Service Agency (FSA)— • Administrative data used in implementation of farm programs. • Foreign Agricultural Service (FAS)— • Supply and use for major commodities in foreign countries based on attache reports, satellite imagery, etc. • Economic Research Service (ERS)— • Short- and longer-term analysis of all aspects of supply and demand. • Both domestic and international market expertise.

10. Forecasts Integrate Data, Models,Statistical Analysis, and Judgment • The monthly forecasting process combines: • Data--Survey data of producers and industry. • Economic models and statistical analysis--Of all aspects of the balance sheet. • Expert judgment--Added information brought to the process. • Forecasts developed during a 2-week process. • Culminates in “lock-up” and 8:30 a.m. release of World Agricultural Supply and Demand Estimates (WASDE).

11. Data: Information: - International - Domestic USDA Interagency Commodity Estimates Committee Process Commodity Forecasts Appear in: WASDE ERS Newsletters FAS Circulars Policy Decisions: Other Forecasts: - Farm Income - Food Prices - Trade How the Short-Term Forecasting Process Works... - Attaché reports - Wire service stories --Short term --Long term

12. Reliability of February Projections Differences between projection and final estimate, 1981/82-2004/05 Commodity Avg. Avg. Differences Below final Above final Animal Products Percent Million pounds Number of years Beef 2..6 653 - 827 1,613 16 6 Pork 2.7 459 -1,240 1,717 15 7 Broilers 1.5 336 -729 484 15 7 Turkeys 2.0 91 -206 161 12 10 Source: USDA’s February 2006 World Agricultural Supply and Demand Estimates report.. WASDE Contains Information On Each Month’s Forecasting Accuracy

13. USDA Also Develops 10-Year Agricultural Baseline Projections • Prepared using similar interagency process. • Based on: • Specific policy assumptions which may or may not turn out to be accurate. • Composite of models and judgmental analysis. • Published in USDA annual report distributed at the February Agricultural Outlook Forum. • Distributed through the ERS website: • http://www.ers.usda.gov/Features/Baseline/Baseline2006/

14. At ERS, Forecasting and Research Programs Are Strongly Intertwined Research Issues Draw from Forecasts and Special Studies Results Feed Back to Forecasts and Studies Forecasting Short-term Forecasts Long-term Baseline Analytical Systems Draw on Each Other Special Studies Policy Analysis Trade Analysis Staff Analysis

15. Why Does USDA Forecast Supply, Use, and Prices? • Ensures availability of basic data and information to all in the marketplace—big companies and small farmers alike. • Provides process for forecasting key variables in important global markets. • Critical to USDA decision-making on trade policy, domestic programs, etc.