Price Forecasting

Price Analysis

Fundamental Analysis Technical Analysis

Fundamental Analysis: involves the use of supply, demand and other economic factors to predict price.

Technical Analysis: involves the use of historical price movementsto provide an indication of future price movement.

Fundamental Analysis

Demand

Supply

Old Price

New Supply

New Demand

New Price

Forecasting Prices Using a Matrix of Factors

Corn

Supply Demand---------------------------------------------------------------------

P Weather if Iowa and Nebraska New corn-based plastic announcedBelow average by 15% by USDA

P Price of Petroleum is down by Japan is likely to buy 2 mmt less5 percent than last year

Corn Price Vs Production

0

2,000

4,000

6,000

8,000

10,000

12,000

90/9

1

91/9

2

92/9

3

93/9

4

94/9

5

95/9

6

96/9

7

97/9

8

98/9

9

99/0

0

Year

Production Price

Econometrics

• The fundamental analysis tool that has enjoyed the most popularity in the last few decades. Econometrics is nothing more than the application of statistical and mathmatical tools to economic relationships so that forecasts can be made because relationships have been quantified.

• A simple price analysis of corn prices might include listing the amount of corn produced versus the price with the thought that more is produced, the lower the price.

Corn Production and Price

Year Production(Billion Bushels)

Price($/bu)

90/91 7,934 2.28

91/92 7,475 2.3792/93 9,477 2.07

93/94 6,338 2.5094/95 10,051 2.2695/96 7,400 3.2496/97 9,233 2.71

97/98 9,207 2.43

98/99 9,761 1.95

Econometrics

• Price = f(Production)• If the function is assumed to be linear, then it can

be expressed as:• P = a - b(Q), where a = intercept, b = slope• P = 2.8- 0.0001*Q• If USDA forecasts next year’s production to be

11,000 million bushel, then plugging the number into formula will yields a forecasted price of $1.70 per bushel.

Ending Stock Total Use Stock-to-Use Ratio Price80/81 1392.129 7282.4 0.19116349 3.1281/82 2536.579 6974.7 0.363682882 2.4782/83 3523.08 7249.1 0.4860024 2.5583/84 1006.261 6692.8 0.150349779 3.2184/85 1648.191 7031.9 0.234387719 2.6385/86 4039.5 6494.2 0.622016569 2.2386/87 4881.7 7385.3 0.661002261 1.587/88 4259.1 7757.3 0.549044126 1.9488/89 1930.381 7259.1 0.265925666 2.5489/90 1344.393 8112.9 0.165710535 2.3690/91 1521 7760.9 0.195982425 2.2891/92 1100 7916.1 0.138957315 2.3792/93 2113 8470.7 0.249448098 2.0793/94 850 7621.73 0.111523237 2.594/95 1558 9352.1 0.166593599 2.2695/96 425.9 8548.6 0.049821023 3.2496/97 883 8788.1 0.100476781 2.7197/98 1307.8 8791 0.148765783 2.4398/99 1796.385 9291.5 0.193336383 1.9599/00 2046.974322 9296.476 0.220188212 1.850323

Corn Stock-to-Use Ratio Vs Farm Price

0

0.5

1

1.5

2

2.5

3

3.580

/81

82/8

3

84/8

5

86/8

7

88/8

9

90/9

1

92/9

3

94/9

5

96/9

7

98/9

9

Stock-to-Use Ratio Price

Econometrics

• Price = f(stock-to-use ratio), • If the function is assumed to be linear, then it can

be expressed as:• P = a - b(STU), where a = intercept, b = slope• P = 2.77- 1.36*STU• If USDA forecasts next year’s stock-to-use ratio to

be 0.25, then plugging the number into formula will yields a forecasted price of $2.43 per bushel.

USDA Publications

– World Agricultural Supply and Demand Forecast (WASDE): Published by World Agricultural Outlook Board,

• 2000 Release Dates: Jan. 12, Feb. 11, Mar. 10, Apr. 11, May 12, June 9, July 12, Aug. 11, Sept. 12, Oct. 12, Nov. 9, and Dec. 12.

– Situations and Outlook Reports (Published around 15th of every month)

• Feed, Wheat , Oil Crops, Rice, Cotton and others• Livestock, Dairy and Poultry

– Weekly Crop Progress (published during growing season) • lists planting, fruiting, and harvesting progress and overall condition

of selected crops in major producing states

– Weekly Weather and Crops Bulletin

– http://usda.mannlib.cornell.edu/usda/usda.html

Other Publications

– Markets also react to any news coming out of foreign countries.

• Attache Reports (published by Foreign Agricultural Services)

– http://www.fas.usda.gov/scriptsw/AttacheRep/default.htm

Technical Analysis

• Using moving average to predict prices: Normally, one, two or three averages such as three-day or three-day and nine day or a three-, nine- and eighteen day average are calculated. By using two or more different averages, turning point signals can be generated.

Single Moving Average Example

10-day Moving Average Calculation for July Wheat

Day Market closeprice

10-dayaverage

Nov 15Nov 16Nov 17Nov 18Nov 19Nov 22Nov 23Nov. 24Nov 25Nov 26Nov 29Nov 30Nov 31Dec. 1Dec. 2

$3.7225 3.77 3.77 3.785 3.7975 3.825 3.72 3.7575 3.645 3.6025 3.53 3.5925 3.5075 3.5425 3.55

3.71753.70273.67723.6513.6272

Single Moving Average Graph

3.58

3.6

3.62

3.64

3.66

3.68

3.7

3.72

30-Nov Nov-31 Dec. 1 Dec. 2

Moving Average

• The moving average will not signal a direction change until after the prices have been changed.

• Longer time periods smooth out the average to a greater degree.

• Shorter moving average may signal the producer or trader to enter or exit the market sooner but you run a greater risk of false signal.

• Single moving average does not give accurate or timely signal, particularly in a choppy market.

Double Moving Average

• If two moving averages are used, the shorter moving average gives the signals while the longer one defines the trend.

• When short average crosses the longer average from the above, then a sell signal emerges (shorter average is less than the longer average).

• When the shorter average crosses the longer average from below, a buy signal is generated (a shorter average becomes greater in value than the longer average .

Double Moving Average Example

Moving Average Calculation for a 3- and 9-day Average

Day Market closeprice

3-day average 9-day average

123456789101112

$2.012.032.041.991.931.911.891.831.811.791.781.73

2.062.021.9861.9431.911.8761.8431.811.7931.767

1.9371.9131.8851.851

Double Moving Average

Three Moving Average• Three moving average also may be used in another way to reduce

false signals.

• In a rising market, the shortest average will be above the middle average and the middle average will be above the longest average. As prices fall, the short average cuts through the middle and long averages from above. This is a signal the markets are changing the direction.

• In the opposite example (in a falling market), the shortest average will be under the middle average and middle average will be under the longest average. When the price begin to rise, the short average cuts the middle and long averages from below. Again, this is a signal of a changing market.

Triple Moving Average

Guidelines for Price, Volume and Open Interest

• Simultaneous increase in price, volume and open interest indicate a technically strong market.

• Simultaneous decrease in price, volume and open interest also indicate a technically strong market.

• Increase in price, coupled with decrease in both volume and open interest, indicate a technically weak market.

• Decrease in price, coupled with increase in both volume and open interest, indicate a technically weak market.

Reading Chart

• Two different types of Chart: Bar and point and figure

• A bar chart is composed of high and low for the day (or week or month or year) and a mark where the market is settled.

– From the movements of price, a bar chartist will attempt to forecast the future prices.

• Techniques used by bar chartist: trendlines, channels, support resistance, double tops, triple tops, double bottom, triple bottoms, bowls, etc.

Relative Strength Index (RSI)

• The RSI looks at the average of the up closes and the average of down closes for a given period. – A 14-day segment is normally used

• Moving average technique. – Exponential moving average to smooths out the inconsistent

movments and give the most weight to recent data.

• RSI confirms change in momentum, signalling an imminent change in market direction.

Stochastic Oscillators

– Oscillators are designed to measure the underlying strength of a price movement in the market.

– Stochastic oscillators forecast market changes by measuring the relative position of the closing price within the daily price range.

• In a bull market, buyers are stronger than seller and push up the price at the end of the trading day. This pattern weaken at the end of the trend. If the market price continues to go up but the closing price is moving toward the low end of the price changes, you should watch for changing markets

• A bear market will see similar pattern in reverse.