How accurate are the price forecasts given monthly or quarterly by university agricultural economists?
John Lawrence, Iowa State University ag economist, set out to answer that very question. He found that, on average, price forecasts for one and two quarters into the future are fairly accurate.
Lawrence studied three methods of price forecasting, using records from 1990 to 2000, including his market hog price forecast published in the Iowa Farm Outlook Newsletter, the Lean Hog Futures and the 10-year seasonal index. Please click here to reference Table 1. (This download requires Adobe Acrobat Reader, a free download.)
The forecast error is defined as the actual average price minus the forecast price. Therefore, a positive error means the forecast was too low and a negative number that the forecast was too high, he explains.
“On average, all three forecasts work pretty well for the first two quarters and are not bad for three and four quarters out,” he says. “But it is not the average that you worry about – it’s the variability.”
Lawrence uses this example: there is a 67% chance that first quarter prices will be from $4.28/cwt. below to $4.28/cwt. above the ISU forecast. Although this range is not very assuring, it is similar to the futures and index forecasts.
Producers must remember that the forecasts represent an average; therefore, they are not very accurate, Lawrence says.
“Forecasts do, with the results of this study, provide a likely range of prices and a realistic measure of the risk,” he says.
“The futures market, with a good estimate of the basis to the cash market, is a quick, always available and free forecast that is as good as anything out there,” he says. “But keep in mind it is a forecast at that point in time, not a guarantee of what prices will be unless the producer takes action to hedge at that price.”
Download more information at www.econ.iastate.edu.