Wednesday, January 6, 2010

Robust assumptions the basis of good research

Happy New Year to you all and the best of prospects for the year to come.

As an economist, I am only too aware of the key role that base assumptions play in the outcome of long-term forecasting. For the results to be sensible so too do the assumptions. Rather than deliberating about potential outcomes the basis of discussion should be around the rigorous testing and analysis of the base assumptions. Often assumptions can be smudged to get the outcome that the research is looking for.

A classic case is some research being undertaken by the USDA’s Office of the Chief Economist that analyzes the Forest and Agricultural Sector Optimization Model (FASOM). With these reports it is best to go straight to check base assumptions….what we found was fairly shocking.

One of the base assumptions appears so erroneous that we checked with several sources to make sure we were reading the data correctly. In the table titled “Acres Devoted to Crop Production Over Time,” 2010 soybean acres are listed as 56 million. Compared to 2009 harvested soybean acres that reflects a one-year 20 million-acre drop!

We make mistakes too... but this soybean acreage cut is the headliner of a one-year 64 million-acre drop in acres planted to principle crops. But the base assumptions still prompt us to question the overall validity of FASOM results — and not just because it points to 59 million acres of “crop and pasture land” being planted to trees, including Corn Belt acres!

Other examples include some silly price and yield assumptions: How can sorghum be priced at $8.12/bu while corn is priced at $2.50/bu in the same year? Oh... and a 69/bu average hard red winter wheat yield in 2010! (The hard red winter wheat crop averaged just 38.2 bu. per acre in 2009)

Other questions: Who inside the Obama administration decided FASOM results should be the “end-all” on climate change impacts? Were the base assumptions challenged before they were handed to the USDA for analysis? Are FASOM “supporters” so out of touch with day-to-day reality that they actually believe the results! If some starting points are so erroneous, how can we trust any of it?

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