Market Situation & Outlook lInterpret market factors that impact prices and resulting marketing and management decisions lAnalyze changing supply and demand factors and how they impact price lBased on economic principles and statistical analysis

Limitations lEfficient market hypothesis »All available information is quickly factored into the markets lNew information and/or changes in supply and demand alter outcomes lParticipants react to forecast

Market Situation lDefine current and recent past lTypically measuring change in key variables to estimate change in price using historic relationships lEvaluate how current relationships differ from historic patterns

Market Outlook lOutlook on a time continuum »Long term: next growing season to multiple years »Intermediate term: within a growing season »Short term: few weeks to few months »Very short term: tomorrow to a few days to next week »Immediate: within day

Long term outlook lBuyers and sellers fully respond to changes in price and adjust quantity supplied and quantity demanded lRely on elasticities and cost curves to estimate quantity changes lImportant for policy analysis and long term investment decisions

Intermediate term outlook lSupply and demand become more inelastic lBuyers and sellers less able to react to price changes and can make limited adjustments to quantity supplied and demanded lSignals market on availability of supply

Short term outlook lRelatively inelastic supply »Sellers willing to sell at prices less than average total cost lRelatively stable demand lPrices adjust to clear supplies

Very Short Term or Immediate lMore of a market timing issue »Should I take this price or wait »Non-storable commodities »Futures markets

Evaluating Source of Information lKnow the source of data and analysis lUnderstand the motivation of the source »Public institution »Private analysis for sale »Private company confidential lWhat are the resources and track record

Sources of Outlook Information lUSDA Data and Analysis Sources »National Agricultural Statistical Service (NASS) »Agricultural Marketing Service (AMS) »Economic Research Service (ERS) »Foreign Agricultural Service (FAS)

Sources of Outlook Information lLand Grant Universities »Long term, 10 Forecast –FAPRI 2010 U.S. and World Agricultural Outlook »Intermediate to short term –Iowa Farm Outlook (Grain, Livestock, Dairy) –Other Universities –Livestock Market Information Center

Sources of Outlook Information lCommodity organizations »Typically narrowly focused on commodity »May miss breath of outlook lPrivate sector market analysis firms »For profit companies that sell services »Often more short-term focused »May be associated with a trading company lIn house analysis »Outlook for the company with own staff

Short to Intermediate Run Forecast lPrice »= f (own supply, supply of substitutes, supply of complements, income, population, exports, imports, marketing margins) »Typically combine own supply and net trade and population into a per capita consumption variable.

Short term outlook lUse price flexibilities »The percentage change in price for a 1% change in some variable (quantity supplied) »Fp i = % P i / % Q i »Approximately = 1/elasticity

Own price flexibilities lAssumes all else equal lAlways negative lTypically about -2.0 to -3.0 for most ag commodities

Cross price flexibilities lThe percentage change in the price of good i resulting from a 1% change in the quantity supplied of good j »Fp ij = % P i / % Q j lFor example, what is the impact on hog prices if beef supplies are large? lTypically much smaller than own supply

Compare to another period lCompare to same time period one year earlier lCaptures seasonal demand and marketing margin factors lEstimate percentage change in supply and then use flexibility to estimate percentage change in price.

Using Flexibilities Change in price of beef= % beef supply ____x -2.0 = ___ +% pork supply ____x -0.3 = ___ +% poultry supply ____x -0.3 = ___ +% income____x +0.2 = ___ +% population____x +1.0 = ___ Flexibilities are estimated based on historic statistical analysis. Percentage change in variables are forecast based on inventory reports and production relationships.

Forecast Supplies lProduction driven and information available »USDA inventory reports »Acreage, expected yield »Marketings »Imports and exports »Trends in weights or yields lRely on historic and biological relationships lCompare change to actual price

Forecast Supplies lUSDA crop reports »Acreage »Crop progress »Carryover in storage lUSDA livestock inventory reports »Cattle on feed »Hogs and Pigs »Hatchery numbers lDemand relatively stable »Population »Exports

Using Flexibilities Change in price of pork in 3 rd quarter % pork supply -3.5 x-3.0= % beef supply +2.5 x-0.3= % poultry supply +4.0 x-0.3= % income+2.0 x+0.2= % population+0.9 x+1.0= +0.9 Total expected impact on price = This is the expected percentage change in price resulting from the supply factors considered.

Price Forecast Example for Hogs lHog price in the third quarter one year earlier averaged $70/cwt carcass lForecast Price = P f = P t-1 x (1 + % P) l$70 x ( ) = $76.90 »Point estimate serves as a starting point »There is an error range around the point »Try to account for other factors such as recent demand, exports, farm to retail margins, etc.

Forecast 5.55 $50$44.45$ % 16%

Other impacts lImports & exports »Put in perspective lMarketing margins lSeasonal patterns lCyclical patterns

Market Situation and Outlook lEconomic principles and statistical analysis lBased on historic relationships and patterns »Seasonal and cyclical patterns lHistory is not a perfect predictor of future »Forecast errors lEfficient market hypothesis lUnderstand the source of data and analysis