World Grain Price Forecasting using Dynamic Factor Models

Because of the financialization of physical resources, the spread of food security awareness, the sharp increase in grain demand in emerging economies such as China, and bio-energy policies, world grain price formation mechanisms have become increasingly complex. This has increased the need to consider various factors related to the financial market, the global economic situation, and agricultural policies of major grain import and export countries as well as world grain supply and demand factors in the forecast of world grain prices. In order to consider these various and valuable information variables, we applied the dynamic factor model which is widely used to predict macroeconomic variables. We attempted several methods applying the dynamic factor model and concluded that the forecasting power improvement is close to 30 ~ 40% especially in mid-term prediction.