OECD-FAO Agricultural Outlook 2023-2032

Annex B. Methodology

This annex provides information on how the projections in the Agricultural Outlook are generated. First, it provides a general description of the different elements and timeline of the process leading to the agricultural baseline projections and the OECD-FAO Agricultural Outlook publication each year. Second, it discusses the consistent assumptions made on the projections of exogenous macroeconomic variables. Third, it provides reference to the underlying Aglink-Cosimo model. Finally, it explains how a partial stochastic analysis is performed with the Aglink-Cosimo model.

The generating process of the agricultural baseline projections

The projections presented in the Agricultural Outlook are the result of a process that brings together information from a large number of sources. The projections rely on input from country and commodity experts, and from the OECD-FAO Aglink-Cosimo model of global agricultural markets. This economic model is also used to ensure the consistency of baseline projections. Significant expert judgement, however, is applied at various stages of the Outlook process. The OECD and FAO Secretariats publish in the Agricultural Outlook a unified and plausible assessment of the future developments of the main agricultural commodity markets given the underlying assumptions and the information available at the time of writing.

The starting point: Creation of an initial baseline

The historical data series for the consumption, production, trade1 and international prices of the various commodities covered in the Outlook are mainly drawn from OECD and FAO databases. These databases are largely based on national statistical sources. For each publication, the baseline generating process begins in November of the year preceding the projected decade and ends in April of the following year. Starting values for the likely future development of agricultural markets are developed separately by OECD for its member states and some non-member countries and by FAO for all remaining countries.

• On the OECD side, an annual questionnaire addressed to national administrations is circulated in November to obtain countries’ expectations of the medium term developments of their agricultural sector , as well as insights on the current status or recent changes of domestic agricultural policies.

• On the FAO side, the starting values for the country and regional modules are developed through model-based projections and consultations with FAO commodity specialists.

Macroeconomic factors obtained from external sources, such as the International Monetary Fund (IMF), the World Bank and the United Nations (UN), are also used to complete the view of the main economic forces determining market developments.

This part of the process is aimed at creating a first insight into possible market developments and at establishing the key assumptions which condition the Outlook. The main macroeconomic and policy assumptions are summarised in the first section of the Trends and Prospects chapter and in specific commodity tables. The sources for the assumptions are discussed in more detail further below.

As a next step, the OECD-FAO Aglink-Cosimo modelling framework is used to facilitate a consistent integration of the initial data and to derive an initial baseline of global market projections. The modelling framework ensures that at a global level, projected levels of consumption match with projected levels of production for the different commodities. The model is discussed below.

In addition to quantities produced, consumed and traded, the baseline also includes projections for nominal prices (in local currency units) for the commodities concerned.

The initial baseline results are then reviewed:

• For the countries under the responsibility of the OECD Secretariat, the initial baseline results are compared with the questionnaire replies. Any issues are discussed in bilateral exchanges with country experts.

• For country and regional modules developed by the FAO Secretariat, initial baseline results are reviewed by a wider circle of in-house and international experts.

Final baseline

At this stage, the global projection picture starts to emerge, and refinements are made according to a consensus view of both Secretariats and external experts. On the basis of these discussions and updated information, a second baseline is produced. The information generated is used to prepare market assessments for cereals, oilseeds, sugar, meats, dairy products, fish, biofuels and cotton over the course of the Outlook period.

These results are then discussed at the annual meetings of the Group on Commodity Markets of the OECD Committee for Agriculture in March, which brings together experts from national administrations of OECD countries as well as experts from commodity organisations. Following comments by this group, and data revisions, the baseline projections are finalised.

The Outlook process implies that the baseline projections presented in this report are a combination of projections and experts knowledge. The use of a formal modelling framework reconciles inconsistencies between individual country projections and forms a global equilibrium for all commodity markets. The review process ensures that judgement of country experts is brought to bear on the projections and related analyses. However, the final responsibility for the projections and their interpretation rests with the OECD and FAO Secretariats.

The Agricultural Outlook delves into the finale baseline projections to provide an overview as well as more detailed analyses of the world agricultural markets over the medium term. The report is discussed by the Senior Management Committee of FAO’s Department of Economic and Social Development and the OECD’s Working Party on Agricultural Policies and Markets of the Committee for Agriculture in May, prior to publication. In addition, the Outlook will be used as a basis for analyses presented to the FAO’s Committee on Commodity Problems and its various Intergovernmental Commodity Groups.

Sources and assumptions for the macroeconomic projections

The Outlook uses the Medium Variant set of estimates from the United Nations Population Prospects database for the population data used for all countries and regional aggregates. For the projection period, the medium variant set of estimates was selected for use from the four alternative projection variants (low, medium, high and constant fertility). The UN Population Prospects database was chosen because it represents a comprehensive source of reliable estimates which includes data for non-OECD developing countries. For consistency reasons, the same source is used for both the historical population estimates and the projection data.

The other macroeconomic series used in the Aglink-Cosimo model are real GDP, the GDP deflator, the private consumption expenditure (PCE) deflator, the Brent crude oil price (in US dollars per barrel) and exchange rates expressed as the local currency value of USD 1. Historical data for these series in OECD countries as well as Brazil, Argentina, the People’s Republic of China and the Russian Federation are consistent with those published in the OECD Economic Outlook No. 112 (December 2022). For other economies, historical macroeconomic data were obtained from the IMF, World Economic Outlook (October 2022). Assumptions for 2023 to 2032 are based on the projections of the IMF World Economic Outlook, October 2022.

The model uses indices for real GDP, consumer prices (PCE deflator) and producer prices (GDP deflator) which are constructed with the base year 2010 value being equal to 1. The assumption of constant real exchange rates implies that a country with higher (lower) inflation relative to the United States (as measured by the US GDP deflator) will have a depreciating (appreciating) currency and therefore an increasing (decreasing) exchange rate over the projection period, since the exchange rate is measured as the local currency value of USD 1. The calculation of the nominal exchange rate uses the percentage growth of the ratio “country-GDP deflator/US GDP deflator”.

The oil price used to generate the Outlook until 2021 is taken from the short-term update of the OECD Economic Outlook No. 112 (December 2022). For 2022, the annual average daily spot price is used, while the December average daily spot price is used for 2023. For the remainder of the projection period, the reference oil price used in the projections is assumed to remain constant in real terms. .

The underlying Aglink-Cosimo model

Aglink-Cosimo is an economic model that analyses supply and demand of world agriculture. It is managed by the Secretariats of the OECD and the Food and Agriculture Organization of the United Nations (FAO), and used to generate consistent baseline projections presented in the Agricultural Outlook and policy scenario analysis.

Aglink-Cosimo is a recursive-dynamic, partial equilibrium model used to simulate developments of annual market balances and prices for the main agricultural commodities produced, consumed and traded worldwide. The Aglink-Cosimo country and regional modules cover the whole world. The OECD and FAO Secretariats in conjunction with country experts and national administrations are responsible for developing and maintaining the projections. Several key characteristics are as follows:

• Aglink-Cosimo is a “partial equilibrium” model for the main agricultural commodities, as well as biodiesel and bioethanol. Other non-agricultural markets are not modelled and are treated exogenously to the model. As non-agricultural markets are exogenous, hypotheses concerning the paths of key macroeconomic variables are predetermined with no accounting of feedback from developments in agricultural markets to the economy as a whole.

• World markets for agricultural commodities are assumed to be competitive, with buyers and sellers acting as price takers. Market prices are determined through a global or regional equilibrium in supply and demand.

• Domestically produced and traded commodities are viewed to be homogeneous and thus perfect substitutes by buyers and sellers. In particular, importers do not distinguish commodities by country of origin as Aglink-Cosimo is not a spatial model. Imports and exports are nevertheless determined separately. This assumption affects the results of analysis in which trade is a major driver.

• Aglink-Cosimo is recursive-dynamic, and outcomes for one year influence those for the next years (e.g. through herd sizes or dynamic yield expectations). Aglink-Cosimo models ten years into the future.

The modelling framework is regularly improved to develop the Outlook’s capacity to reflect future markets developments and to provide an enhanced analysis of beyond market outcomes (e.g. food security, land use and environmental outcomes).

As of the 2022-2023 Outlook cycle, the Secretariats have explicitly incorporated the use of the three main mineral fertilisers (Nitrogen, Phosphorus and Potassium) into the yield equations that determine the supply of crop commodities. This new feature separates the costs of fertilisers from those of other production inputs (energy, seeds, machinery, labour and other tradable and non-tradable inputs). Historical data series for fertiliser use per crop has been developed by combining existing information on total use from FAOSTAT with per crop estimates from the International Fertilizer Association.

Food loss and waste has been incorporated in the OECD-FAO Agricultural Outlook 2023-2032. Box 1.1 provides a more detailed overview of the definitions, global estimates and drivers. In terms of implementation in the data and Aglink-Cosimo, two shares have been added: one for distribution losses and one for waste. Consequently, three different values for food use of agricultural commodities are available. Firstly, food availability which was the value used in previous Agricultural Outlooks. Secondly, after subtracting losses food consumption is obtained. Currently, this is the main reference value used throughout the report and tables. Thirdly, food intake is the quantity after accounting for waste. The current values of loss and waste are preliminary, and this integration is still in progress.

The latest detailed documentation of Aglink-Cosimo model is available on the official website of the Agricultural Outlook www.agri-outlook.org.

The model used to generate the fish projections is operated as a satellite model to Aglink-Cosimo. Exogenous assumptions are shared and interacting variables (e.g. prices for cross-price reactions) are exchanged. The fish model went through substantial revision in 2016. The aggregated aquaculture supply functions of 32 components of the model were replaced by 117 species-specific supply functions with specific elasticity, feed ration and time lag. The main species covered are salmon and trout, shrimp, tilapia, carp, catfish (including Pangasius), seabream and seabass, and molluscs. A few other minor productions such as milkfish were also included. The model was constructed to ensure consistency between the feed rations and the fishmeal and fish oil markets. Depending on the species, the feed rations can contain a maximum of five types of feed; fishmeal, fish oil, oilseed meals (or substitutes), vegetable oil and low protein feeds like cereals and brans.

The methodology of stochastic simulations with Aglink-Cosimo

The partial stochastic analysis highlights how alternative scenarios diverge from the baseline by treating a number of variables stochastically. The selection of those variables aims at identifying the major sources of uncertainty for agricultural markets. In particular, country specific macroeconomic variables, the crude oil price, and country- and product-specific yields are treated as uncertain within this partial stochastic framework. Apart from the international oil price, four macroeconomic variables are considered in all countries: the consumer price index (CPI), the gross domestic product index (GDPI), the gross domestic product deflator (GDPD) and the US-Dollar exchange rate (XR). The yield variables considered contain crop and milk yields in all model regions.

The approach applied to determine the stochastic draws of these variables is based on a simple process which captures the historical variance of each single variable. The three main steps of the partial stochastic process are briefly explained below.

(i) The quantification of the past variability around the trend for each macroeconomic and yield variable separately

The first step is to define the historical trend of stochastic variables. Often a linear trend does not represent adequately observed dynamics. Consequently, a non-linear trend is estimated by applying a Hodrick-Prescott filter, which seeks to separate short-term fluctuations from long-term movements.2 The filter is applied to the yield time series directly and to year-on-year changes for macro variables.

(ii) The generation of 1 000 sets of possible values for the stochastic variables

The second step involves generating 1 000 sets of possible values for the stochastic variables. For each year of the 2022-2031 projection period, one year of the historical period 1995-2021 is drawn. The relative deviation between the actual variable value of that year and the respective trend value estimated in step 1 is then applied to the value of the variable in the actual projection year. All variables thereby receive the value of the same historical year. The process, however, handles macro variables separated from yields, as both are not strongly correlated.

(iii) The execution of the Aglink-Cosimo model for each of these 1 000 possible alternative sets of values (uncertainty scenarios)

The third step involves running the Aglink-Cosimo model for each of the 1 000 alternative “uncertainty” scenarios generated in step 2. When both macroeconomic and yield uncertainty were included, this procedure yielded 98% successful simulations. The model does usually not solve all stochastic simulations as the complex system of equations and policies may lead to infeasibilities when exposed to extreme shocks in one or several stochastic variables.

Notes

← 1.  Trade data for regions, e.g. the European Union or regional aggregates of developing countries, refer only to extra-regional trade. This approach results in a smaller overall trade figure than cumulated national statistics. For further details on particular series, enquiries should be directed to the OECD and FAO Secretariats.

← 2.  The filter was popularised in the field of economics in the 1990s in Robert Hodrick and Edward C. Prescott (1997), “Postwar U.S. Business Cycles: An Empirical Investigation”, Journal of Money, Credit, and Banking, Vol. 29 (1), pp. 1–16, JSTOR 2953682.