The May 2015 WASDE report will be released on May 12. Previous research has shown that the release of these early projections–particularly in May–has a significant impact on prices in the corn futures market. While it’s clear that the WAOB yield forecasts are perceived by market participants as containing important new information, these forecasts appear to be poorly understood by many and often confused with later forecasts released by the National Agricultural Statistics Service (NASS) of the USDA.
The purpose of today’s article is to describe the methodology for WAOB corn yield forecasts, demonstrate how the methodology has changed over time, and evaluate the historical accuracy of the forecasts. The analysis of forecast accuracy updates results published in an earlier research report on USDA forecasts and estimates. That evaluation was for the period 1993 through 2012. Here we extend the analysis for corn through the 2014 crop year.
The USDA’s World Agricultural Outlook Board (WAOB) provides one of the key early assessments of prospects for the U.S. average corn yield. WAOB forecasts of national corn yield are released in May, June, and July and are based on relatively simple trend analysis of historical yields sometimes modified by planting progress and/or weather conditions.
Despite the simplicity, WAOB corn yield forecasting procedures have been surprisingly variable over time. The changing procedures, however, did not generate large year-to-year changes in corn yield forecasts until 2010, when the May forecast, 165.3 bushels, jumped a whopping 8.1 bushels over the 2009 forecast. The variability that first emerged in 2010 continued through 2014.
Our analysis of WAOB May, June, and July yield forecasts for corn over 1993-2014 showed that the frequency of under-estimates exceeded the frequency of over-estimates in all three months, forecast errors were occasionally very large, and the magnitude of the extreme over-estimates exceeded the magnitude of the extreme under-estimates. The two largest forecast errors occurred in 1993 and 2012 and are readily explained by the unusual weather conditions in these two years (floods in 1993 and drought in 2012). Forecast error trend results suggest that the major change in WAOB forecast methodology that started in 2010 neither increased nor reduced forecast errors.
In sum, while there are no glaring problems with the accuracy of WAOB corn yield forecasts, the forecasts have been subject to criticism from time-to-time because of changing methodology, perceived inappropriate period for calculating trend, or lack of sensitivity to other potential yield indicators such as crop conditions.
Some of the criticism also probably reflects a lack of understanding of the forecasting methodology. In particular, some market participants appear to be unaware of the difference between the WOAB and NASS forecasting methodologies. A substantial change was apparently made in 2010-2014, as reflected in much larger year-to-year variation in May yield forecasts. It is not unreasonable to anticipate that this changing menu of forecasting methods creates some confusion on the part of market participants.
It would be very helpful if the WAOB made all data used in estimating yield models available to the public and produced a written document that outlines the exact process used to determine forecasts, including the roles of crop weather regression forecasts, subjective judgment, and any other inputs. This would go a long ways towards reducing confusion about WAOB yield forecasting methods and improving the transparency of these important forecasts to market participants.