Forecasting Class III milk prices in a volatile market

Abstract

Repeated experiences of volatility with Class III milk prices have caused many producers, wholesalers, and retailers to avoid risk management decisions involving the Class III milk price; instead market participants realize profits as they occur without managing their financial environment based on their expectations. This research forecasted Class III milk price from August 2012 to July 2014 using data from January 2000 to July 2012. The conclusions of this study found that the unrestricted vector autoregressive model is the best forecast both for ex-post and out-of-sample methods. Additionally, it was determined that the futures prices are not strong reflections of feed costs, although one to four months prior to expiration the futures contract price reflects the current feed costs to some degree. Also six to eight months prior to contract expiration there is little movement in the contract price, and the previous month's price has a large influence on the current month's price during this time. It can be concluded that the futures contract price is largely driven by current market conditions during the remainder of the time prior to contract expiration.