Economists miss the mark on the markets
Every summer, I attend the annual conference of the American Agricultural Economics Association. One aspect of that conference every year is that those agricultural economists who follow commodity prices make forecasts for prices for the next year and then there are presentations made on the outlook for grain and livestock prices. Each year, the past year's forecasts are reviewed and the economists who made the "best" forecasts are recognized. This past year there were no winners. No blue ribbons were handed out, only red and white ones. All forecaster were overly optimistic a year ago with where they thought prices would be at the present time. To give you an idea of how badly they missed the markets, the forecaster who was the closest on corn was still more than $2.50 per bushel too high. Fed cattle and feeder cattle price forecasts were generally $10-15 per cwt higher than current price levels. Forecasts for hog prices and milk prices were also far higher than current prices. The "best" forecast for crude oil prices only missed the current prices by $60 per barrel.
Is this typical for the so called experts to all miss the markets so badly? In most years, many price forecasts may miss the actual price levels, but there tends to be about an equal number who forecasts prices to be higher than they actually end up as those who forecast prices to be lower than they end up. It is also more likely that the consensus price forecast for one commodity may be too high and for another commodity the consensus price forecast is too low. So what was different this past year?
There were market experts who were anticipating a correction in the US markets in general. There were concerns that the financial markets had some problems that needed fixed. However, other than a very few "radicals", no one predicted the severity of the market correction and certainly no one predicted all of the ramifications across world economies and markets. It would take much more space than I have for this short article, and more brains than I have, to document all of the changes in the past year. However, let me just briefly mention a few that have had major ramifications for commodity prices in the US.
First of all, US consumers do not have as much disposable income to spend on beef steaks, bacon, ice cream, or boneless, skinless chicken breasts. As consumers saw there 401K plans lose 40% of their value, as many saw the value of their homes decrease, and as some suddenly found themselves in the unemployment lines, they cut back on their purchases. Demand for many products has been reduced. Similarly, consumers have reduced their driving, which reduced demand for gasoline and therefore crude oil and ethanol. Hence the drop in crude oil prices and the unexpected decrease in corn prices.
Another major factor that has impacted US agricultural prices is the loss of export markets. By loss of markets I don't mean to say that we no longer have the markets; we just have seen a reduction in the growth in those markets and or an actual decrease in the volume of products into those markets. This has resulted from two factors. The economies of many of our export market countries are not any better than our economy. Therefore, consumers in those countries are also tightening their belts and cutting back on spending. Hence demand has been reduced. To further compound are export problem, the US dollar has gained strength against many of the currencies of our trading partners. That has increased the cost of our products to them, further weakening their demand for our products.
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