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Tuesday, November 25, 2014

Using logic in forecasts - how did Mecardo stack up?

By Angus Brown  |  Source: MLA's NLRS, ACU

Key points

  • Mecardo’s market directions have been correct, with price moves underestimated by 10-20%.
  • Stronger than expected demand has been behind variances, while the lack of spring rainfall saw an overestimate of lamb prices for the spring.
  • Using supply and demand and seasonality to forecast prices is pretty reliable in predicting market direction. 


2014-11-24 Lamb And Sheep Review FIG 1

2014-11-24 Lamb And Sheep Review FIG 2

2014-11-24 Lamb And Sheep Review FIG 3

 

We’ve had a number of requests to review our forecasts and assess where we were right, wrong and thereabouts. The end of the year offers a good opportunity to review the market, and our forecasts, as a precursor to again looking ahead.

Back on 23 January, we published two articles looking at supply and demand in sheep and lamb markets and made some price predictions.  In Tight supplies could see ESTLI above 500¢/kg in the short term, Augusto forecast the Eastern States Trade Lamb Indicator (ESTLI) to rise from 400¢/kg cwt to 440-480¢ by March and 480-530¢ by June (figure 1), both of which were well above where the seasonal price trend would have the market.

Figure 1 shows that these forecasts underestimated the actual rise in the market. This was, as it turned out,  the result of stronger than expected demand, and despite supply also being stronger than expected. The last line in the “What does this mean?” suggested ‘postponing sales (or buying more lambs) for another few months should deliver some positive results’, which it did.

In the same week we published a mutton article Is there upside for sheep prices?. This again suggested there was significant upside for sheep markets from the 200¢/kg cwt they were at in January. Again we underestimated the magnitude of the rise, again because of better than expected demand.

In June we forecast lamb prices for the second half of 2014 again, in the article What does spring hold for lamb markets?. This time, the price fall was underestimated (blue circle, figure 1), with a price in the 480-520¢ range expected for the market low in November.

As we now know, the dry spring led to stronger supply, which pushed prices out of this range to the 450¢/kg cwt level.  However in the 25 June article If El Nino comes, how will it affect sheep and lamb prices’ we did forecast a floor for lamb prices at 400¢/kg cwt. While it hasn’t officially been an El Nino, rainfall patterns have been similar and prices have held well above this level. Spring slaughter has been 10% higher than we expected even under an El Nino, which we pegged as being similar to 2013, (figure 3) as early finishing and selling of spring lambs has seen record supply levels.

Our mid-year forecasts for mutton were less decisive, but we thought an El Nino would see a minimum mutton price of 200¢/kg cwt. As history shows, this would have required a much larger fall than we actually saw, with the National Mutton Indicator bottoming out at 270¢/kg cwt.  Again, very strong demand saw the market hold at higher than expected levels, with our supply forecast under an El Nino scenario, of being similar to the large 2013 slaughter levels, pretty close to the mark (figure 4).

What does this mean?

The challenge with trying to forecast prices, as most economists will agree, is that demand and supply are constantly moving, and this is especially so with livestock.  While we can get a reasonable handle on supply, demand is a bit more difficult. In livestock markets a major driver of supply variability is the season; this has played a significant role in recent years.

That said, when making trading decisions it is vital to firstly have a view on the market direction. This should be based on logic, which has been the basis for the Mecardo sheep and lamb forecasts over the past year.

A review of Mecardo’s forecasts shows that, by and large, the advice satisfied this test. This at a time when we were forecasting price movements at the edge of historical norms.

Mecardo regularly updates its forecasts. Later in the week we’ll be updating our lamb price outlook, so stay tuned. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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