By definition, seasonal index is a forecasting tool used to determine demand for various commodities or goods in a given marketplace over the course of a typical year (or shorter time period). Such an index is based on data from previous years that highlights seasonal differences in consumption.
So, what is the definition of forecasting? Forecasting is a planning tool that helps management in its attempts to cope with the uncertainty of the future, relying mainly on data from the past and present and analysis of trends.
Now that we understand the seasonal index and forecasting, we can begin the steps of developing a seasonal forecast for a specific commodity. Let's start with historical data. We will look at a set of past-periods data and use this as a basis for forecasting future data or trends. For this example, we developed the seasonal index to forecast the future price of cash corn.
At The Ag Fix we use 10 years of prior-periods data to construct our seasonal index. Why would we choose 10 years? With the increased demand for corn created through the federal Renewable Fuels Standard (RFS), the seasonal tendency for corn demand has shifted over the past 10 years. The RFS program was authorized under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007.
In the chart below, you can see we calculated the seasonal index for cash corn in NW Iowa. The seasonal low price for cash corn is during the September/October harvest period. We use the October low to then project a seasonal cash price in the future. On the same chart, we include the current average cash prices received by farmers in NW Iowa.
As you can see in the chart above, we can visually compare the seasonal forecasted price in relationship to the actual current cash price. Therefore, we have the past-period prices built into our seasonal index forecast, and the present price in the actual NW Iowa cash. We can now analyze the current trend of the market. If the market is not trending in relationship to the seasonal forecast, we then need to monitor the fundamental conditions and determine if we expect these factors to continue or change soon. Let's recall - forecasting is a planning tool helping us cope with the uncertainty of the future.
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