IDEAS home Printed from https://ideas.repec.org/p/ags/aaea16/235931.html
   My bibliography  Save this paper

Forward‐Looking USDA Price Forecasts

Author

Listed:
  • Adjemian, Michael K.
  • Bruno, Valentina G.
  • Robe, Michel A.

Abstract

USDA generates monthly season‐average price forecasts for key agricultural commodities. Uncertainty about each forecast is indicated by its publication as a price interval. USDA’s forecasting methodology is non‐public, but its uncertainty levels are anecdotally based on historical patterns of price uncertainty and informed by expert opinion. No confidence level is attached to USDA’s intervals, so it is difficult to gauge their accuracy. But in practice, realized season‐average prices regularly fall outside of USDA‐forecasted intervals, particularly those made prior to harvest and late in the marketing year. We demonstrate that forward‐looking density forecasts for the season‐average corn price can be constructed based on the market’s expectation of volatility implied by commodity options premia, combined with historical forecast errors between futures market prices and cash prices paid to farmers. Because implied volatility is forward‐looking, confidence intervals based on these densities reflect anticipatory market sentiment not present in historical data. In out‐of‐sample trials, our 95% confidence intervals contained the final season‐average price for over 92% of the 358 forecasts made between 1995/96 and 2014/15. Compared to a model based on historical data alone, the forward‐looking model is less susceptible to forecast errors. Our approach can enhance the informational value of USDA season‐average price forecasts.

Suggested Citation

  • Adjemian, Michael K. & Bruno, Valentina G. & Robe, Michel A., 2016. "Forward‐Looking USDA Price Forecasts," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235931, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea16:235931
    DOI: 10.22004/ag.econ.235931
    as

    Download full text from publisher

    File URL: http://ageconsearch.umn.edu/record/235931/files/Forward%20Looking%20USDA%20Price%20Forecasts.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Michael K. Adjemian, 2012. "Quantifying the WASDE Announcement Effect," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(1), pages 238-256.
    2. Gary Koop & M. Hashem Pesaran & Ron P. Smith, 2013. "On Identification of Bayesian DSGE Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(3), pages 300-314, July.
    3. Peter F. Christoffersen & Francis X. Diebold, 2000. "How Relevant is Volatility Forecasting for Financial Risk Management?," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 12-22, February.
    4. J. Frank & P. Garcia, 2009. "Time-varying risk premium: further evidence in agricultural futures markets," Applied Economics, Taylor & Francis Journals, vol. 41(6), pages 715-725.
    5. Liu, Xiaoquan & Shackleton, Mark B. & Taylor, Stephen J. & Xu, Xinzhong, 2007. "Closed-form transformations from risk-neutral to real-world distributions," Journal of Banking & Finance, Elsevier, vol. 31(5), pages 1501-1520, May.
    6. Hartzmark, Michael L, 1991. "Luck versus Forecast Ability: Determinants of Trader Performance in Futures Markets," The Journal of Business, University of Chicago Press, vol. 64(1), pages 49-74, January.
    7. Isengildina-Massa, Olga & Irwin, Scott H. & Good, Darrel L., 2010. "Quantile Regression Estimates of Confidence Intervals for WASDE Price Forecasts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(3), pages 1-23, December.
    8. Egelkraut, Thorsten M. & Garcia, Philip & Irwin, Scott H. & Good, Darrel L., 2003. "An Evaluation of Crop Forecast Accuracy for Corn and Soybeans: USDA and Private Information Agencies," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 35(1), pages 1-17, April.
    9. Smith Alexander, 2011. "Identifying In-Group and Out-Group Effects in the Trust Game," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-13, June.
    10. Scott H. Irwin & Darrel L. Good, 2004. "Evaluation of USDA Interval Forecasts of Corn and Soybean Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 990-1004.
    11. Egelkraut, Thorsten M. & Garcia, Philip, 2006. "Intermediate Volatility Forecasts Using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(3), pages 1-21, December.
    12. Olga Isengildina-Massa & Scott Irwin & Darrel Good & Luca Massa, 2011. "Empirical confidence intervals for USDA commodity price forecasts," Applied Economics, Taylor & Francis Journals, vol. 43(26), pages 3789-3803.
    13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    14. Kastens, Terry L. & Schroeder, Ted C. & Plain, Ronald L., 1998. "Evaluation Of Extension And Usda Price And Production Forecasts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(1), pages 1-18, July.
    15. Linwood A. Hoffman & Xiaoli L. Etienne & Scott H. Irwin & Evelyn V. Colino & Jose I. Toasa, 2015. "Forecast performance of WASDE price projections for U.S. corn," Agricultural Economics, International Association of Agricultural Economists, vol. 46(S1), pages 157-171, November.
    16. Esben Høg & Leonidas Tsiaras, 2011. "Density forecasts of crude‐oil prices using option‐implied and ARCH‐type models," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(8), pages 727-754, August.
    17. Sanders, Dwight R. & Manfredo, Mark R., 2003. "USDA Livestock Price Forecasts: A Comprehensive Evaluation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(2), pages 1-19, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adjemian, Michael K. & Bruno, Valentina & Robe, Michel A. & Wallen, Jonathan, 2017. "What Drives Volatility Expectations in Grain and Oilseed Markets?," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258452, Agricultural and Applied Economics Association.
    2. Golden, Dana, 2020. "Basis as a Game: Game Theory and Determination of Cash Grain Prices," 2020 Annual Meeting, July 26-28, Kansas City, Missouri 304194, Agricultural and Applied Economics Association.

    More about this item

    Keywords

    Agribusiness; Agricultural and Food Policy; Agricultural Finance; Demand and Price Analysis; Financial Economics; Marketing; Risk and Uncertainty;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aaea16:235931. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search). General contact details of provider: http://edirc.repec.org/data/aaeaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.