Edward Lotterman
The U.S. Department of Agriculture just released its key Aug. 1 forecast of corn production for 2025. It predicts a record harvest, up 13% from last year.
This is good news for the overall economy — more output from available resources is better than less. Also, all other things being equal, it is good for some farmers including livestock operations that buy a lot of corn.
However, contrary to what many might think, a big crop is bad on balance for farmers who sell corn. That apparent paradox — greater output bringing less income — contains an economics lesson.
News of this ag forecast was largely submerged in the brouhaha over the Bureau of Labor Statistics employment and consumer price numbers, a blaze re-stoked by President Donald Trump naming a new BLS commissioner with no experience and a bad reputation among economists.
The day after the corn crop forecast, the BLS released Producer Price Index numbers for July showing an 0.9% one-month spike from June, 3.3% over a year earlier and a 5.6% rate if you annualize the most recent three months. With that gas on the monetary policy fire, a 13% increase in national corn production won’t get much attention outside of the farm sector.
But for the rest of us, it illustrates issues about which economic indicators the government measures.
A USDA crop forecast is fundamentally different from tabulations by the BLS of employment numbers or of prices paid by households and business. Those look backward. They use statistical survey methods that sample households, employers or consumer items.
USDA does conduct many such backward-looking surveys. One can look up, county by county, how many acres of corn or cotton were planted or harvested and what the yields were. Cattle and hog slaughter numbers come out daily. So some USDA reports resemble those of statistical agencies within the Labor and Commerce departments. In fact, somewhat by historical accident, we measure far more things in farming than in any other economic sector.
However, USDA crop forecasts differ in that they estimate a future outcome. The task is more complex than getting accurate samples from a given population. Yes, they do need accurate numbers on how many acres planted where and what condition they are in.
But they also must factor in subjective variables of how rain, temperature, sunlight and even humidity will affect yields between Aug. 1 and harvests in October and November. Moreover, details matter. Nighttime temperatures, for example, have different effects than daytime ones.
These relationships vary by soil types and fertilization levels and across more than 30 states. Coastal North Carolina, central Wisconsin and eastern Kansas all differ in soil-weather-yield relationships. Constructing a mathematical prediction model thus inherently involves making dozens of calibrated but subjective choices.
These forecasts give corn producers, processors, transporters and users better information to plan going forward. Individual farmers otherwise would have no way of knowing what is going on around the country. And in a national and global market, these data will determine the price and demand they will see for their crop down the road.
Understand that while carefully constructed, outcomes can and do vary from these forecasts.
Large grain traders and processors, whether corporations like Cargill or ADM, or cooperatives like CHS, have resources to make forecasts for their own internal use. Having USDA do this for general publication levels the playing field.
Working with agriculture in developing countries teaches one the importance of improving information for the smallest market participants. As an economist on a livestock project in Peru decades ago, it was evident to me how middlemen buying their fiber at markets in isolated towns took advantage of peasant alpaca raisers. These producers had no way of knowing what prices might be offered at other towns in the area. So they faced take-it-or-leave-it offers from the scalpers.
This was before cell phones, but the producers did listen to local radio stations. A modest effort to induce radio stations to report wool, alpaca fiber, potato and other prices in their areas was a concrete step toward greater fairness and economic efficiency.
The same logic applies to USDA market information. Weekly, USDA reports on hay prices in Pipestone, Minn., and Rock Valley, Iowa. These unremarkable towns just happen to be where sales of hay have become major adjuncts to weekly auctions of livestock. Perhaps only 20 wagon loads or truck loads get sold, but these reported prices serve as a reference point for other farmers wanting to buy or sell by private treaty. Auctions provide “price discovery” for a broader market.
Similarly, USDA national yield projections, in addition to reports on crop plantings and conditions, provide useful info for myriad decision makers. The result is that better decisions are made, resources are more productive.
So getting back to the Aug. 1 report, why would the forecast of a bumper crop be bad news for farmers? And what is the economics behind this?
The problem is one of a larger supply facing an inelastic demand — the situation in which a market’s willingness to buy different quantities does not vary much with regard to price. Not only does this mean that prices will fall because of increased yields, the simpler supply-and-demand equation. It also means that the drop in price per bushel will more than wipe out the increase in the number of bushels harvested. People won’t buy more because there’s more on the market or because it costs less. So farmers will get less total money per acre of the crop.
This outcome is not limited to farming. The first thing anyone gaining monopoly power does is cut back output from what prevailed with greater competition. It is precisely why monopolistic sellers collude to fix prices. They can all earn more by agreeing how much each must cut production.
Farmers are too numerous to collude like this. When nature gives them bountiful yields, they do enjoy the pleasure any grower has in reaping abundance. But they know that their net incomes will be lower than if the national crop were smaller.
The very worst position as an individual farmer is to have a poor crop in a year when yields are high nationally, depressing prices. That happened to us on Sept. 4, 1974, when an early frost hit our valley killing our corn just as a good crop nationally was coming in. Kandiyohi County in Minnesota is in a similar boat this year. Flooding damaged some 30% of its crop acres in June. Low local production coupled with low national prices will hammer affected farmers.
The flip side occurs when an area with good yields when bad weather smites the crop nationally. In 1973, historic rains from May into July devastated crops in 20 states. Yet here and there, farms with well-drained upland fields had good yields and high net incomes.
That is the upside for Minnesota corn producers. The 16.1% yield increase for us tops the major corn-producing states. If these actually materialize, Minnesota will weather a falling-price year better than most of the rest of the nation, including the Dakotas, Iowa or Wisconsin.
The situation differs with the degree of integration of a crop into world markets. The Bretton Woods exchange rate system made U.S. farm products expensive in world markets. When President Richard Nixon repudiated the system 54 years ago this week, it seemed a national humiliation but touched off a boom for agriculture. The U.S. became the largest exporter of ag commodities and exposure to wider markets reduced the impact of weather variations on price. Now, as Trump’s tariffs taint U.S. farm exports, how this will mesh with a projected record crop is anyone’s guess.
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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.
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