While USDA crop production forecasts have performed reasonably well over a 36-year period, there is room for improvement, according to two University of Illinois professors in a recent study.
"USDA may want to consider expanding the scope of the subjective yield surveys it uses in making the forecasts in order to incorporate a wider range of market and industry participants," says Darrel Good, a professor in the Department of Agricultural and Consumer Economics, who co-authored the study with Scott Irwin, who is the Laurence J. Norton Professor of Agricultural Marketing in the department.
However, the bigger problem Good and Irwin found is the apparent continuing misunderstanding of USDA's motives, methods and procedures used to arrive at the production forecast for U.S. corn and soybean crops.
"This misunderstanding was vividly illustrated by comments from producers, commodity analysts and farm market advisory services following the release of the August 2003 forecast," says Good. "Some described their reaction as 'dismay' and questioned the motives of USDA.
"Some in the agricultural community apparently even believe that USDA manipulates crop forecasts to fulfill some mystical objectives that are contrary to the best interest of farmers."
The report, "Understanding USDA Corn and Soybean Production Forecasts: Methods, Performance and Market Impacts over 1970-2005," can be viewed online through farmdoc at: http://www.farmdoc.uiuc.edu/agmas/index.html.
Good and Irwin decided to examine the crop production forecasts over a 36-year period to learn if they matched final production figures or if they varied widely and unpredictably.
To generate its crop production forecasts, USDA uses a highly sophisticated and well-documented procedure, Good explains.
"USDA generates crop production forecasts based on estimates of planted and harvested acreage and two types of yield indications – a farmer-reported survey and objective measurements," says Good.
The study found that month-to-month changes in USDA corn and soybean production forecast from 1970 through 2005 indicated little difference in magnitude and direction of monthly changes over time.
"There appeared to be no trend in the size or direction of forecast errors over the study period," says Good.
On average, USDA corn production forecasts were more accurate than private market forecasts over 1970-2005. One exception was the August forecast over 1985-2005.
"The forecasting comparisons for soybeans were somewhat sensitive to the measure of forecast accuracy considered," says Good. "One measure showed that private market forecasts were more accurate than USDA forecasts for August regardless of the time period considered. Another measure showed just the opposite."
USDA corn production forecasts had the largest impact on corn futures prices in August and recent price reactions have been somewhat larger than historical reactions, Good notes.
"Similar to corn, USDA soybean production forecasts had the largest impact on soybean futures prices in August with recent price reactions appearing somewhat larger than in the past," says Good.
In the final analysis, the study failed to confirm suspicions by some that the crop production forecasts were inaccurate or biased.
"Our analysis suggests that over the long run the USDA performs reasonably well in generating crop production forecasts for corn and soybeans," says Good. "There is strong evidence that market participants view USDA corn and soybean production forecasts as important new information.
"There is clearly a need for a better understanding of all aspects of the USDA crop production forecasting process."