Friday, August 10, 2012

World Supply Estimates

USDA’s monthly report is out today. A lot of attention is going to the new corn estimates, which put forecasted yields at 123 bu/acre. Trend yield for 2012 is about 160 bu/acre, so that would mean a 23% drop from trend. That’s still not quite as bad as 1988, which was closer to 30% belowtrend. As Wolfram showed in a previous post, the heat this year has been about as bad as ever, the rainfall not quite as bad as 1988. So overall I don’t think the downward revisions by USDA should come as much of a surprise.

What I hadn’t been paying as much attention to was the situation in other crops. Lost in the news was that USDA actually downgraded the forecast of global production not just for corn and soy, but also wheat and rice. Wheat downgrades are mainly related to the former soviet union, with Russia and Kazakhstan seeing “July heat and dryness across most of the spring wheat growing areas.” For rice, there have been lots of stories about the late monsoon in India, although conditions seem to be improving there a lot in the last week.

Overall, the production forecasts for wheat, rice, and coarse grains are all lower than what production was last year. This is not so unusual in a historical sense. For example, I plot below the global production for these three since 1961 (all points up to 2010 are from FAO, last 2 are estimates/forecasts from the latest USDA numbers). Gray lines show years where production of all three was down from previous year. Since 1961 there have been 7 other years where all three crops dropped, including three since 2000. 

Even if it’s not unusual, it’s a little surprising to me that it would occur in a year that had such high prices to begin with. A lot of economists argue that yields are very price responsive, for example farmers will put more fertilizer or labor into a crop if prices are high. Others say that yields and production are not very responsive in the short term, but over the long term production will respond (mainly because of expanding area). I’m not sure yet what to make of the recent data, but it certainly seems like a good test of theory. Hopefully somebody out there is calculating what production changes over the past 3-4 seasons, when prices have been high, can tell us about the likely value of supply elasticity.

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