Long-Term Corn, Soybeans, and Wheat Price Forecasts
- February 4, 2015
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Farm Supply
- News
As indicated in the farmdoc daily article on January 14, 2015, many crop producers are in the process of making the farm program participation decision for the five years beginning with the 2014 crop. Price expectations for this five-year period play a central role in the decision. Several farmdoc daily articles (e.g., October 14, 2014; December 18, 2014; January 27, 2015) illustrate the sensitivity of expected program payments to alternative price projections for 2014/15. Long-term price projections for some crops are available from several sources, including the USDA’s 10-year baseline projections, the Congressional Budget Office (CBO) 10-year baseline projections, and 10-year projections provided by The Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri. While USDA, CBO, and FAPRI baseline price projections may not be considered forecasts in the strictest sense because they are developed for policy analysis, they are generally referenced as sources for forming price expectations by producers enrolling in the farm program. Given the importance of the program participation decision, the accuracy of these long-term projections is of obvious relevance. The January 14 article examined the historical accuracy of two sources of long-term forecasts for corn: i) the USDA’s 10-year baseline projections; and ii) the corn futures market. Here we examine the accuracy of these two sources of forecasts for soybean and wheat prices and repeat the examination for corn in order to provide a comprehensive analysis in one location.
Background
It is generally believed that most Midwest farms will be enrolled in either the Price Loss Coverage (PLC) or the Agricultural Risk Coverage (ARC) County option. Regardless of the program choice, annual marketing year average prices are part of the formula that determines the magnitude of annual program payments. For producers enrolled in the PLC program, annual payments will be made if the marketing year average farm price for corn, soybeans, and wheat is less than the trigger price of $3.70, $8.40, and $5.50 per bushel, respectively, and no payment will be made if the marketing year average price is above the trigger price. If the average price is below the trigger price, the magnitude of payments is determined by the larger of the marketing year average farm price and the CCC loan rate and the farm payment bushels, which are a function of base farm yields and base farm acres. For the ARC County program, an annual payment will be made if the county revenue (marketing year average price times the county average yield) is less than 86 percent of the benchmark revenue. The benchmark county revenue in any given year is the five-year Olympic average of county yields times the five-year Olympic average of U.S. marketing year prices. The magnitude of payment for an individual farm will be determined by the shortfall in county revenue, if any, and the number of payment acres. Payments per acre in any year are capped at 10 percent of the benchmark revenue.
While price is central to the magnitude of annual program payments, a given price in any year may have different implications for PLC and ARC payments since the formula for determining payments are not the same for both programs. The Farm Bill Toolbox at the farmdoc website has a suite of decision tools to help producers evaluate the program alternatives and select the appropriate alternative for their farms. The tools allow for the evaluation of alternative price scenarios over the five-year duration of the program. An important question for producers using these tools is the appropriate price scenarios to consider. In a farmdoc daily article on March 13, 2014, Carl Zulauf and Gary Schnitkey examined the implications of using alternative historical corn price patterns to forecast the price pattern for the 2014-15 through 2018-19 marketing years. In addition, long-term price forecasts that could be used in the program choice evaluation are available from a number of sources. The USDA, for example, makes 10-year price projections in their annual baseline projections released in February each year. An early release of the February 2015 projections can be found here. In addition, the Congressional Budget Office (CBO) makes long-term baseline price projections for agricultural commodities. See the CBO’s January 2015 Baseline for Farm Programs for an example. The Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri also provides long-term baseline price projections for agricultural commodities. Projections made in January 2015 can be found here. Finally, soybean and wheat futures prices provide a forecast of prices for some duration. Selected hard red winter futures contracts, for example, are currently listed through July 2017 and selected soybean futures contracts are listed though November 2018, although contracts were not listed that far in the future in previous years.
Analysis
We examine the historical accuracy of two sources of long-term corn, soybean, and wheat price forecasts: i) the USDA’s 10-year baseline forecasts; and ii) the futures market. The history of USDA’s 10-year forecasts is depicted by the blue lines in Figures 1, 2 and 3. Each blue line represents a 10-year period that starts with the marketing year on the horizontal axis. The first forecast, made in February 1997, was for the 1996/97 through the 2005/06 marketing years. The second forecast, made in February 1998, was for the 1997/98 through the 2007/08 marketing years, and so on. The final forecast, depicted by the magenta line, is for the 2014/15 through the 2024/25 marketing years. The red line in each Figure depicts the actual marketing year average price from 1996/97 through 2014/15, with the 2014/15 average price reflecting the January 2015 WASDE forecast.
Figures 1-3 indicate that over the period examined, USDA tended to forecast a “steady-state.” That is, current prices were generally forecast to persist into the future. The exception was during periods of very high prices when prices were forecast to decline in the early years of the forecast period and then to stabilize at lower prices. Forecasting a steady-state means that forecast errors will be large when supply and/or demand shocks are experienced. The period from 2006/07 through 2013/14 contained a number of supply shocks in the form of low U.S. wheat yields in 2011, fluctuating world wheat production, low U.S. corn yields, particularly in 2012, and a small South American soybean crop in 2012. In addition, the period represented a time of substantial growth in corn demand from ethanol production and large increases in Chinese soybean demand. Large price forecast errors are obvious, particularly in the later years.