Thursday, October 15, 2009
Hog Marketing: Is There Any Way To Really Predict Prices?
The nation’s pork producers have seen deeper losses over a more prolonged period than the price collapse a decade ago. And it goes without saying any light on the horizon is seen as a glimmer of hope that the end is near and profitability will soon be restored in the pork industry. Many producers will look at futures prices for that hope, and others will depend on market forecasts by land grant university livestock economists. But is one more accurate than the other?Livestock price forecasts are issued by marketing specialists to help producers reduce the risks they have in making production decisions. Those forecasts are developed from USDA reports, the historical relationships between price and supply, the current supply and demand, and a look at future supply and demand. Iowa State University livestock economist John Lawrence has issued a series of reports evaluating those market outlooks, the futures market, and the seasonal price cycle to determine which is a better forecaster of hog prices at the time producers are ready to sell.
Lawrence initially looked at a 10 year history of the futures market and the seasonal index. His results were calculated by subtracting the forecast price from actual price. He says the forecast errors ranged from $0.99 per head to $3.46 per head which implies the market price was usually underestimated. Lawrence reports there is a 68% chance that prices three months in the future will range above or below his forecast price by $5.33 per head. But he says, “When looking four quarters into the future, the time necessary to make breeding decisions, the 68% range grows to over $14.84 for the least variable forecast.” He says the seasonal cycles have the smallest errors, regardless how far in the future the forecast is made, however it also has the greatest variability.
Lawrence’s quarterly forecasts took on some personalities of their own, regarding their accuracy. He notes, “On average, all forecasts did a fairly good job predicting hog prices in the volatile markets. As shown by the average errors, the January Forecast itself was best at predicting one quarter into the future, and worst at predicting three quarters into the future. The April Forecast was best at predicting four quarters into the future and worst one quarter into the future. The July and October Forecasts were best at predicting two quarters into the future, and worst four quarters into the future.”
When Lawrence analyzed the weekly prices of the lean hog futures contract, and compared it to the expiration price, he found that some months trend above the expiration price, others trend below it, and some are on both sides of it. His study of those contracts over the past 10 years found, “The contracts for April through October tended to have more years where the weekly prices were below the expiration price on average, indicating positive errors, or under prediction by the weekly prices. February varied widely, and December had more years with weekly prices above the expiration price on average, indicating over prediction.” He says the most accurate month on average was February and the least variable month was August. He says, on the whole, the Lean Hog Futures contract is very accurate in predicting the price at expiration, and is a good tool to help traders make accurate and profitable decisions.
Finally, Lawrence looks at the significance of errors that the futures contracts make in predicting the expiration price. Over the past 18 years he says, “There is not a consistent pattern across the contracts. February, April, and October vary widely on average. June (with the exception of 8 weeks out) and August tend to under forecast on average. December tends to over forecast on average. On average, all contracts have a slight tendency to over forecast.”
Summary:
For pork producers wanting to make better marketing decisions as a means of improving their potential profitability, the use of market outlooks, futures prices, and seasonal cycles can all provide significant assistance, but it is important to know the potential for errors. Each have the tendency to err on one side or the other of the eventual market price when a futures contract expires. However, some months are typically over estimating the market and others underestimate, and it is also possible to know how much the error is expected to be. A study of those trends and errors can create profitable marketing plans for pork production
Posted by Stu Ellis on 10/15 at 01:31 AM | Permalink