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 Agriculture Affect 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 Pork from 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 8 th and 12 th of each month.

7. 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 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 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

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

12. WASDE Contains Information On Each Month’s Forecasting Accuracy Reliability of February Projections Differences between projection and final estimate, 1981/82-2004/05 Commodity Avg. Differences Below final Above final Animal Products PercentMillion poundsNumber of years Beef 2..6653 - 827 1,613 16 6 Pork 2.7459-1,2401,717 15 7 Broilers1.5336 -729 484 15 7 Turkeys 2.0 91 -206 161 12 10 Source: USDA’s February 2006 World Agricultural Supply and Demand Estimates report..

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/http://www.ers.usda.gov/Features/Baseline/Baseline2006/

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

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.