Forecasting and Hedging Crop Input Prices

Agricultural producers and input suppliers have to make management decisions based on forecasts all the time, however, most available forecasts are for outputs (e.g., grain and livestock). Research has shown that one of the most important determinants of relative profitability for producers is being a low-cost operator. Research has also shown that relatively simple forecasting models are often superior to more complex models. Thus, producers may benefit from having simple models for forecasting crop input costs. The objective of this research was to estimate models based on futures markets that could be used to forecast input prices, specifically, diesel fuel, natural gas, and anhydrous ammonia. Results suggest that diesel prices forecasted using the crude oil or heating oil futures market are reasonably accurate and that this approach may be superior to using an historical average. While diesel prices could be effectively cross hedged with the crude oil or heating oil futures market, the contracts represent relatively large quantities which may exceed individual producer's needs so cross hedging may only be practical for input suppliers. Likewise, producers using natural gas for irrigation can use the natural gas futures market to predict what their local cash prices will be. Anhydrous ammonia prices can be predicted using natural gas prices, however, because of a major structural change that occurred in the nitrogen fertilizer industry during the mid nineties these price forecasts are less reliable.