The Uncertain Value of Perfect ENSO Phase Forecasts: Stochastic Agricultural Prices and Intra-Phase Climatic Variations

Abstract:

Climate and crop yield variability associated with El Niño—Southern Oscillation (ENSO) are now predictable within limits. This predictability suggests a potential to tailor agricultural management to mitigate impacts of adverse conditions and to take advantage of favorable conditions. However, improved climate predictions may benefit society only with parallel advances in our ability to use this knowledge. We show that the value that will accrue to any given actor from an ENSO phase forecast should be viewed not as a known number but instead as a random draw from a distribution, even when the forecast is always correct. Forecast value depends on the highly variable contexts in which forecasts are used. Randomness in forecast value has significant implications for choices made by forecasters, forecast users and policy makers. To show randomness, we estimate potential economic values of ENSO forecasts for agricultural producers based on two realistic assumptions: the crop prices farmers receive are uncertain; and within an ENSO phase, the actual climate is variable in ways that affect profits. The use of synthetic weather and crop price series, with crop simulation models, helps show the range and likelihood of climate forecast value.