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The Forecasting Value of New Crop Futures: A Decision-Making Framework

Author

Listed:
  • Dwight R. Sanders

    (Darden Restaurants)

  • Philip Garcia

    (University of Illinois at Urbana-Champaign)

  • Raymond M. Leuthold

    (University of Illinois at Urbana-Champaign)

Abstract

The statistical forecasting efficiency of new crop corn and soybean futures is the topic of frequent academic inquiry. However, few studies address the usefulness of these forecasts to economic agents' decision making. Each year Central Illinois producers are faced with the decision to plant either corn or soybeans on marginal acreage. Agronomic concerns aside, these decisions hinge on the expected relative return of corn versus soybeans, which is largely a function of expected new crop prices. Do new crop futures prices reliably guide producers into the correct production decision? The results suggest that over the entire period of the analysis, futures markets provide only marginal decision- making information to the producer; however, more recent signals do appear to be useful. Further analysis explores several possible factors that could explain why the signals have improved so significantly since 1985.

Suggested Citation

  • Dwight R. Sanders & Philip Garcia & Raymond M. Leuthold, 1998. "The Forecasting Value of New Crop Futures: A Decision-Making Framework," Finance 9805003, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9805003
    Note: Type of Document - pdf; prepared on PC; to print on HP Laserjet; pages: 21; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 98-05. For a complete list of OFOR working papers see
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    File URL: http://econwpa.repec.org/eps/fin/papers/9805/9805003.pdf
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    References listed on IDEAS

    as
    1. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-533, October.
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    3. Breen, William & Glosten, Lawrence R & Jagannathan, Ravi, 1989. " Economic Significance of Predictable Variations in Stock Index Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1177-1189, December.
    4. Kahl, Kandice H. & Tomek, William G., 1986. "Forward-Pricing Models for Futures Markets: Some Statistical and Interpretative Issues," Food Research Institute Studies, Stanford University, Food Research Institute, issue 01.
    5. Cumby, Robert E. & Modest, David M., 1987. "Testing for market timing ability : A framework for forecast evaluation," Journal of Financial Economics, Elsevier, vol. 19(1), pages 169-189, September.
    6. David Kenyon & Eluned Jones & M. Anya McGuirk, 1993. "Forecasting Performance of Corn and Soybean Harvest Futures Contracts," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 75(2), pages 399-407.
    7. James S. Eales & Brian K. Engel & Robert J. Hauser & Sarahelen R. Thompson, 1990. "Grain Price Expectations of Illinois Farmers and Grain Merchandisers," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(3), pages 701-708.
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    More about this item

    Keywords

    forecasting efficiency; futures prices; decision making;

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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