The Economics of Fortune Telling
People have tried to predict the weather since the beginning of time. And while we may have come a long way since believing the world is flat or that everything revolves around the planet Earth, we're no closer to understanding all of the nuances that make the atmosphere react how—and more importantly, when—it does.
Likewise, the globalization of our financial system, in the process of creating endless opportunities, has created endless uncertainties—creating its own unpredictable atmosphere.
No one can know exactly how either are ever going to turn out and yet, there is one industry that has to deal with the consequences of each on a daily basis: Agriculture.
Some, including the Wall Street Journal, have criticized the U.S. Department of Agriculture for its inability to accurately predict these unpredictable circumstances, saying that economists are to blame for inaccurate forecasts.
"Over the past two years, the Department of Agriculture's monthly forecasts of how much farmers will harvest have been off the mark to a greater degree than any other two consecutive years in the last 15," reported the Journal.
But long-time producers and users of the supply and demand data think the USDA should be applauded for its work, not discouraged, noting weather anomalies of the past few years and an unparalleled market rollercoaster.
When we consider the task at hand—to predict exactly how much of each commodity is on each individual farm, what the weather will do throughout the year, what the yields will look like, and where the prices will fall, not to mention Americans' eating habits and food trends—it's not as if a simple formula will do the trick. A crystal ball would be more helpful.
"Weather is both hard, if not impossible, to predict and the major determinant of crop yield variations from the norm," said Jack Roney, an economist with the American Sugar Alliance and former economist with the USDA.
Roney pointed out that while the Journal did acknowledge USDA forecasts, over time, are as accurate as any private forecasting, they missed the bigger picture.
"They failed to note the value to farmers and consumers of having objective USDA forecasts to consider, rather than relying on forecasts of commodity trading firms that may bias their reports to favor their positions in the futures market."
Not to mention the value we see when we compare the USDA's system to foreign countries.
Roney says the article also failed to note another major factor regarding the cost of USDA forecasts to farmers and consumers: None.
"And that's compared to trade house commodity-forecast subscriptions that can be very expensive," he said.
Bottom line? "Some years USDA projections will prove to be more accurate than others, some years the weather varies more from normal expectations than others. But Americans are well served by USDA's crop forecasting work."
And without the Agency's hard work, farmers would have a lot more to worry about than unpredictable weather patterns and economic volatility.
 
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