Commodity Forecasting in the U.S. Department of

Agriculture

Presentation for Vietnamese OfficialsFebruary 2006

William HahnSenior Economist, Market and Trade

EconomicsEconomic Research Service, USDA

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?

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.

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.

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

Report

U.S. Pork Supply, Use, and Price 2006 Projections

I tem 2005 Est. J anuary February

Million pounds

Beginning stocks 543 535 492 Production 20,702 21,205 21,235 I mports 1,002 1,000 1,000 Supply, total 22,247 22,740 22,727 Exports 2,658 2,755 2,755 Ending Stocks 492 545 515 Total Consumption 19,097 19,440 19,457 Per Capita Consumption 49.9 50.3 50.4

Price (cents/ lb) 50.05 44-47 42-45

Note: Totals may not add due to rounding. Pounds are retail-weight basis. Price is national base, live equivalent, 51-52% lean. Data are from the February 9, 2006 WASDE report.

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.

Numerous Agencies Are Involved in Developing USDA

Forecasts

JAWF

• Weather Information• Weather and Crop Yield

Assessments• Early Warnings

NASS

• Planting Intentions• Crop Condition Assessment• Production and Stocks Estimates• Season Average Prices• Inventory Numbers• Marketing and Slaughter Data

INTERAGENCY COMMODITYESTIMATES 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

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

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

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.

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.

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).

How the Short-Term Forecasting Process Works...

USDA Interagency Commodity Estimates Committee Process

Data:- International

- Domestic

Information:

Commodity Forecasts Appear in:WASDE

ERS NewslettersFAS Circulars

Other Forecasts:- Farm Income- Food Prices

- Trade

Policy Decisions:

- Attaché reports- Wire service stories

--Short term--Long term

WASDE Contains Information On Each

Month’s Forecasting AccuracyReliability 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..

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/

ForecastingShort-term Forecasts

Long-term Baseline

Analytical SystemsDraw on Each Other

ResearchIssues Draw from

Forecasts andSpecial Studies

Results Feed Back toForecasts and Studies

Special StudiesPolicy Analysis

Trade Analysis

Staff Analysis

At ERS, Forecasting and Research Programs Are

Strongly Intertwined

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.