What Do USDA or FAPRI Commodity Price Projections Tell Us
Mar 30, 2015
On March 27, Agriculture Secretary Tom Vilsack announced that USDA would extend the deadline for farmers to make decisions about which commodity support program to enroll in under the 2014 farm bill by one week, to April 7, 2015. In that announcement, the Secretary indicated that 90 percent of producers have already decided between Agricultural Risk Coverage (ARC) and Price Loss Coverage (PLC) as their primary farm safety net program for the next five crop years, although the share of program acres accounted for by those farmers was not disclosed.
The 2014 farm bill provided funds to be allocated to farm policy experts to develop web-based decision tools to help farmers make the decision as to which program to enroll in. In the summer of 2014, USDA awarded the funds to two consortia of land-grant based agricultural economists to do the work--one led by the University of Illinois, and the other led by the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri and the Agricultural and Food Policy Center (AFPC) at Texas A&M University.
These tools utilize model-based price projections to give farmers an idea of how market prices for program crops might behave over the lifetime of the 2014 farm bill. The University of Illinois tool APAS (for Agricultural Policy Analysis System) incorporates official USDA price projections developed primarily by economists at USDA’s Economic Research Service, while the FAPRI/AFPC tool uses separate price projections generated by FAPRI economists and their baseline models. These two sets of projections are never identical, although to avoid too much confusion the analysts involved usually compare notes before they release their annual 10-year forecasts or projections.
These baseline projections are primarily used to help gauge the effectiveness and federal budget implications of proposed policy changes before the proposals become part of the formal legislative process. A third set of projections, developed by the U.S. Congressional Budget Office, are actually used to provide official cost estimates or ‘scores’ for proposed policy changes during the legislative process
In utilizing the decision tools described above, farmers should be aware exactly what the 2014-18 crop prices embedded in those tools are based on. By now, the prices for the 2014/15 crop year are well on their way to being fully realized, especially for fall-planted crops such as winter wheat. Projected prices for the upcoming 2015/16 crop year are based primarily on what was known about weather conditions and cropping patterns in major producing countries around the world at the time the baselines were released, in February 2015.
For the final three years of the 2014 farm bill, however, the baselines incorporate assumptions about agricultural policy and weather that may prove to be inaccurate by the time those crop years roll around. As to farm policy, the baselines typically assume that current law (i.e., primarily the provisions of the 2014 farm bill) will remain in effect unchanged over the projection period. Although the models actually run hundreds of scenarios to examine the impacts of various weather and demand patterns, the decision tools utilize the average prices generated by that process, which essentially reflect normal weather patterns. If for one or more of those years farmers enjoy a bumper crop, like 2014, or face a significant production decline from widespread drought, as happened in 2012, then the price projections will be off the mark for that year and the years that follow.
With the wild weather variability that farmers have been experiencing in recent years likely to continue due to the effects of climate change, knowing what the underlying price projections in the decision tools represent is a key piece of information for farmers.