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As maddeningly divorced from fundamentals as the futures market can appear at times, it still provides the most accurate price forecast, according to recent research conducted at the University of Illinois
July 19, 2010
As maddeningly divorced from fundamentals as the futures market can appear at times, it still provides the most accurate price forecast, according to recent research conducted at the University of Illinois. That research compares the performance of land-grant university outlook forecasts for futures market-hog and fed-cattle prices with forecasts implied by futures markets.
A recent livestock and meat pricing analysis by Glynn Tonsor, Kansas State University assistant professor, provides the following primary conclusions:
University outlook forecasts identify the direction of price movements more accurately than futures market forecasts in only 2 of 11 evaluations for market hogs and 1 of 7 evaluations for fed cattle.
Outlook forecasts of both market-hog and fed-cattle prices add additional information beyond what exists in the futures market approximately 50% of the time.
The relationship between outlook and futures market-based forecasts has changed little over the past three decades.
“This study’s findings are consistent with many others that [concluded] outlook forecasts are rarely more accurate than comparable futures market implied forecasts. Accordingly, livestock producers (and price-forecasting practitioners) are well served to utilize basis-adjusted forecasts implied by the futures market,” Tonsor says. “However, this does not imply university-based outlook forecasts are not valuable to producers. In particular, the study found outlook forecasts to provide incremental information not captured by the futures market. Livestock producers may reap broader educational benefits from less traditional outlook forecasts that span beyond short-term price forecasts and include other research findings of relevance to industry decision makers.”
Incidentally, in that age-old quest for deeper, broader information to utilize in calculating basis, check out www.beefbasis.com. It's a free, web-based, risk-management tool that allows producers to forecast basis for specific cattle weights, lot sizes and classes, within narrow in-state geography.
You can find a BEEF magazine article about beefbasis.com and a rudimentary explanation of basis at beefmagazine.com/markets/marketing/basis-risk/.
For more information about the cited study, see Tonsor’s "Connecting Livestock Producers with Recent Economic Research" at www.agmanager.info/
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