NOVEMBER 7, 2003
UNDERSTANDING USDA CORN AND SOYBEAN PRODUCTION ESTIMATES
Recent comments from producers
and others suggest that there is an ongoing misunderstanding of
US Department of Agriculture (USDA) motives, methods and procedures
used to arrive at production forecasts for corn and soybean crops.
This was vividly illustrated by comments from producers, commodity
analysts and farm market advisory services following the release
of the August 2003 forecasts. Some in the agricultural community
apparently even believe that the USDA manipulates crop forecasts
to fulfill some mystical objectives that are contrary to the best
interest of farmers. The purpose of this article is to improve understanding
of USDA crop forecasting methods, performance and market impact.
To begin, the USDA uses a highly sophisticated and well-documented
procedure to generate its crop production forecasts. For corn and
soybeans, US production forecasts are released in August, September,
October, and November, with final estimates published in January.
The USDA generates production forecasts based on estimates of planted
and harvested acreage and two types of yield indications, a farmer-reported
survey and objective measurements. A review of USDA's forecasting
procedures and methodology confirms the objectivity and consistency
of the forecasting process over time. No changes in methodology
occurred in 2003.
In terms of forecast performance, month-to-month changes in USDA
corn and soybean production forecasts from 1970 through 2002 indicate
little difference in magnitude and direction of monthly changes
over time. The size of the monthly changes tends to diminish across
the forecasting cycle (August through November). There is a positive
relationship in the size and direction of forecast changes across
months in both corn and soybeans, with the largest correlations
found in corn. Monthly changes in USDA forecasts have been anticipated
reasonably well by the private sector. As measured against the production
estimate in January after harvest, USDA production forecast errors
are largest in August and smaller in subsequent forecasts. There
appears to be no trend in the size or direction of forecast errors
over the study period.
On average, USDA corn production forecasts are more accurate than
private sector forecasts over 1970-2002 (Table 1). One exception
is the August forecast in the most recent time period (1985-2002).
In contrast, private sector soybean production forecasts are more
accurate than USDA forecasts in August and September, with the exception
of the September forecast in the earlier time period (1970-1984).
USDA corn production forecasts
have the largest impact on corn futures prices in August and recent
price reactions have been somewhat larger than historical reactions.
For soybeans, the largest reaction in futures prices occur in August
and September, but recent reactions have been large in October.
As predicted by economic theory, there is a negative relationship
between the direction of forecast surprises and the direction of
price reactions for both corn and soybeans, with a somewhat stronger
relationship for corn than for soybeans.
Despite many claims to the contrary, the August, September and
October 2003 USDA corn and soybean production forecasts were within
or near historical ranges in terms of magnitude of changes, market
surprise and price reaction (Tables 2 and 3). The September and
October soybean forecasts were major market surprises, and the market's
price reactions showed this, but they were not unprecedented.
Overall, the analysis reviewed
in this article suggests the USDA performs reasonably well in generating
crop production forecasts for corn and soybeans. There is strong
evidence that market participants view USDA corn and soybean production
forecasts as important new information. There is nonetheless room
for improvement. In particular, the USDA may want to consider expanding
the scope of the subjective yield surveys to incorporate a wider
range of market and industry participants. Further details on USDA
crop forecasting methods and complete results can be found at: http://www.farmdoc.uiuc.edu/agmas/reports/03_07/AgMAS03_07.pdf.
Issued by: Darrel
Good and Scott
Irwin, Department of Agricultural and Consumer Economics