Price Forecasting

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GRAIN MARKETING AE 423
Chapter 5
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Price Forecasting Approaches 1. Fundamental
Approach- A study of the factors that affect
the supply of and demand for a given commodity.
Long run oriented. 2. Technical Approach- A
study of the market itself rather than of the
external factors that affect supply of and demand
for a given commodity. Short run oriented. Areas
of Technical Analysis 1. Patterns on price
charts 2. Trend following methods 3.
Character of market analysis 4. Structural
theories
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Chances To Sell Corn At 2.70 Or Higher
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Chances To Sell Soybeans At 6 Or Higher
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Fundamental Factors Affecting Grain
Markets Longer term factors
Domestic market trends Demand- Population,
income, livestock, and poultry numbers,
tastes and preferences, industrial use Supply-
Technology, input prices, prices of
competing products Foreign market
trends Demand Supply
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U.S. CORN YIELD, 1866-1998
160.0
140.0
120.0
Single Cross Hybrids
100.0
Yield, Bu/A.
80.0
60.0
Double Cross Hybrids
Open Pollinated Varieties
40.0
20.0
0.0
1866
1874
1882
1890
1898
1906
1914
1922
1930
1938
1946
1954
1962
1970
1978
1986
1994
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1.6/yr. decrease in 1990
Semi-dwarf Varieties
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Economic Growth Food Demand

• As income grows, food consumption changes
  dramatically
• Type, quantity, and quality changes
• More higher value livestock products, fruits and
  vegetables etc, consumed
• Changes affect domestic demand, supply, and trade

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Concepts

• Food Consumption
• Tons of cereal equivalents per capita/year
• A) One ton of wheat one ton of cereal
  equivalent
• B) Plant food cereal equivalents are based on
• calorie content compared to cereals
• C) Livestock food equivalents are based on grain
  
• (cereal) equivalents of feed used to raise
  the
• livestock.
• Income
• Gross National Product per capita in U.S.
• Adjusted for purchasing power parity in 1996

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Table 1 Representative Cereal Equivalent
Conversion Factors
Commodity
Conversion Factor
Plant Products Cereals Pulses
Roots and tubers Fruits Vegetables
Oil seeds Raw sugar Tree
nuts Livestock Products1 Beef Pork
Chicken Eggs Milk
1.00 1.30 0.32 0.20 0.10 1.60 1.35 1.15 11.7 6
.0 3.2 3.6 1.2
1Liveweight conversion factors includes feed
for breeding stock.
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Figure 1. Per Capita World Food Consumptionby
Income Level, All Countries, 1996
2.5
2.0
1.5
Cereal Equivalents (tons/capita/year)
1.0
0.5
0.0
0
5000
10000
15000
20000
25000
30000
GNP/capita Adjusted for Purchasing Power Parity
(US )
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Figure 2. Distribution of World Population
byFood Consumption and Income Level, 1996
- 2.00
- 1.50
Cereal Equivalents (tons/capita/year)
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- 0.85
15
- 0.50
55
of World Population
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1,500
4,000
10,000

30,000
GNP/capita Adjusted for Purchasing Power Parity
(US )
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Figure 3. Food Consumption and Income
Changes from 1961 to 1985
2.8 2.4 2.0 1.6 1.2 0.8 0.4 0
1961 1985
Argentina
Australia
U.S.
Ireland
France
Canada
Germany
Greece
Spain
Yugoslavia
Cereal Equivalents (Tons/Capita)
Italy
Japan
Ecuador
Mexico
Brazil
Thailand
Malaysia
South Korea
China
Indonesia
0 5000
10000
15000
GNP/Capita (1985 Dollars)
Source Rask
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Figure 4. Per Capita Food Consumptionby Income
Level, Selected Countries, 1996
France
USA
Ireland
Argentina
Germany
Portugal
Spain
Cereal Equivalents (tons/capita/year)
Brazil
Russia
Mexico
China
Indonesia
India
Bangladesh
Mozambique
GNP/capita Adjusted for Purchasing Power Parity
(US )
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Figure 5. Food Consumption and Income byWorld
Population Breakdown
Food Consumption in Cereal Equivalents (Tons/Capit
a)
2 1.5 0.85 0.5 0
Stage IV
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Stage III
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Stage II 55
of World Population
Stage I
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GNP/Capita
0 1,500 4,000 10,000 15,000
20,000 30,000
Source Rask.
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Figure 6. Annual Per Capita Meat
Consumption,U.S., 1960-1996
Pounds
Beef
Pork
Poultry
Chicken
Poultry and chicken series revised starting in
1987 to exclude ready-to-cook chicken going to
pet food Source Agricultural Outlook, USDA and
Agricultural Statistics, USDA
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Figure 7. Retail Prices, U.S., 1955 - 1990
Cents per pound
Beef
Pork
Poultry
Source USDA and Stout
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Fundamental Factors Affecting Grain Markets
Contd Shorter term factors Weather Storage
facilities Transportation bottlenecks Interest
rates Trade agreements Embargoes Labor
Disputes Exchange rates Inventory
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Patterns on Price Charts 1. Bar Charts Plot the
high, low, and close Can be daily, weekly, or
monthly Search for patterns in price trends that
signal market reversal 2. Point and
Figure Charts Only direction of price change
matters Time is not important Develop a scale
and mark X for the price increases and O
for price decreases Result is columns of Xs and
Os that signal market reversal
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Soybeans Nearby Futures Bar Chart
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Chart Formations that Signal a Trend Change 1.
Key Reversals (top and Bottom) Prices
increase to new highs, then fall below previous
days low and close lower. 2. Island
Reversal Prices gap higher, trade at new
level for 1-2 days, then prices gap
lower. 3. Double or Triple Tops and Bottoms
Double bottoms occur in areas of major price
support. Double tops occur where major
price resistance halts advances.
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4. Double or Triple Tops and Bottoms
(continued) Highly reliable
formation. On a daily chart the formation would
be complete in about 3-5 weeks. Implies
that a large subsequent price move will
follow. 5. Head and Shoulder Tops and Bottoms
One of the most highly reliable
indicators. Appears with high frequency at
end of major price moves. Need to
establish neckline which projects distance of
next price moves. Sell when prices break
through neckline from above or buy when
prices break through neckline from below.
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Point and Figure Charts Time is irrelevant. Price
scale is indicated by spaces between lines. Must
select price scale. A 2 x 8 on July soybeans
refers to size of space that must be filled
before a reversal takes place (8). Highs and lows
only are used. In rising markets, only highs are
plotted indicated by Xs. In falling markets,
only lows are plotted indicated by Os. A shift
of one column to the right occurs when there is a
change from plotting new highs to new lows
or new lows to new highs. Buy if a new column of
Xs moves one space higher than the
previous column of Xs. Sell if a new column of
Os moves one space lower than the
previous column of Os.
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Advantages of Price Patterns Charting services
are readily available Some analysts have used
them very successfully Can assist trader even if
not highly successful Disadvantages of Price
Patterns Can become a self-fulfilling
prophecy Highly subjective Results may be no
better than random selection
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Trend Following Methods 1. Moving Averages
Arithmetic average over a given period of
time. Period of time is constantly moving
forward by adding the most recent price and
dropping the oldest price. Key is selecting
length of moving average. Buy when short-term
average crosses the long-term from
below. Sell when short-term crosses the
long-term from above.
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Corn Nearby Futures Moving Average
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2. Relative Strength Index (RSI)
U RSI 100 x -------
UD U Average up price
change for N days UD Average up price change
for N days Plus Average down price for N
days As prices increase the RSI approaches 100
and identifies a price peak. As prices
decrease the RSI approaches 100 and identifies
a price trough.
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Advantages of Trend Following Methods Objective
Clearly defines strategy Identifies big swings
that make big money Disadvantages of Trend
Following Methods Whipsaws are inevitable All
signals are are acted on late by
definition Optimum rules for trend in one period
may not work in another
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Character of Market Analysis 1. Traditional
Volume and Open Interest If prices are up
and A. Volume and open interest are up, then
market is strong. B. Volume and open interest
are down, then market is weak. If prices
are down and A. Volume and open interest are
up, then market is weak. B. Volume and open
interest are down, then market is strong.
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Corn Nearby FuturesVolume Open Interest
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2. On Balance Volume (Cumulative Volume)
On balance volume (OBV) traded normally moves
parallel to price. When OBV diverges from
price, its a signal that prices are about to
change. Tracks accumulation and
distribution of contracts to identify what big
money traders are doing before market reacts.
If prices close higher, daily volume is added
to previous total. If prices close lower,
daily volume is subtracted from previous total.
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3. Contrary Opinion Look for widely held
opinion about future price of a commodity,
then take opposite position. Strong bias
of opinion supported by weak facts. 4.
Oscillators Measurement of price change
rather than price level. Subtract one
days price from a base period price.
Difference is or -. As decreases, market
losing momentum. As - decreases, the sell
is slowing. Works well in trading
markets, not trending markets.
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Soybean Nearby Futures Stochastic
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Structural Theories 1. Seasonal Price Movements
Look for seasonal patterns in price
movements. Can buy March soybean meal on
Oct. 5 and sell on Feb. 5 and profit 74 of
time. Lows usually occur in Oct. and
Nov. 2. Time Cycles Important high
and lows are spaced by distinct, repeating
intervals.
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3. Elliott Wave Theory Price move in a 5
wave sequence in line with the direction of the
main trend. Very subjective method. 4.
Kondratieff Wave Russian economist in the
1920s. 54 year cycle has repeated three
times in U.S. history. Last bottom was
in 1930s.
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Typical Bar Chart
Sources Purcell and Koontz (1999) and Catlett
and Libbin (1999)
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Uptrend Line Drawn across Two Daily Price Lows
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Trend Line and Sell Signal on the December 1997
Corn Chart
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Trends Related Chart Signals in a Selective
Hedging Program
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Trend Line and Sell Signal on the December 1997
Corn Chart
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Resistance Plane at Life-of-Contract Highs
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Support Plane at Life-of-Contract Low
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Key-Reversal Top on a Bar Chart
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Hook-Reversal Top on September 1997 Soybean
Futures
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Island-Reversal Top on a Bar Chart
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Island-Reversal Bottom on Dec 1997 Kansas City
Wheat Futures Chart
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Double Top on a Bar Chart at Contract Highs
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Double Bottom on a Bar Chart at Contract Lows
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Head-and-Shoulders Top on a Bar Chart
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Head-and-Shoulders Bottom on a Bar Chart
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Examples of Gap Formations
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Bar Chart for December 1997 Corn
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Point-and-Figure Chart for Dec 1997 Corn with a
0.04 Cell Size and a Three-Cell Reversal
Requirement
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Demonstration of 3- and 10-day Moving Averages
for Lean Hog Futures Calculations and Buy-Sell
Signals
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Bar Chart and Performance of 9- and 18-day Moving
Averages for Dec 1996 Corn Futures
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Demo of the Pattern in Open Interest to
Anticipate and Confirm a Top in the Market
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Use of the 14-day RSI on the October 1997 Feeder
Cattle Contract
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Major Time Cycles in Commodities
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Elliott Wave Theory of Five Up Waves and Three
Down Waves