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It’s prediction time

Editor Lynn Jaynes Published on 02 January 2016

It’s prediction time, when ag analysts and economists will try to predict what will happen this year. So it’s a good time to remind you that they have no idea what will happen. None.

Okay, not none – but close. They’re accurate about 45 percent of the time, and the other 55 percent of the time they’ll miss it by a country mile. And this isn’t even a big secret.

In fact, it’s so well known that Citigroup publishes the “economic surprise index” which tracks whether economic predictions missed the mark (either high or low) and by how much against Bloomberg surveys. The surprise index is said to gauge momentum shifts (we thought “this” would happen, but “that” happened instead, so there must be a shift somewhere).

There is arguable value to the surprise index. Is it just an economist’s or analyst’s report card, or is there predictive value for the health of the economy? After all, it gauges what has already happened against what a subjective prediction of what we thought might happen. Regarding the value of the surprise index, the jury is still out.

Common indicators for analysts and economists include oil prices, commodity prices, unemployment, electricity output (who knew?), railcar loadings, federal tax receipts and deposits, business credit and inventories, mortgage applications, profits cycles, S&P 500 forward earnings, new factory orders, short-term business credit, commercial and industrial loans and more.

For instance, in the Yardeni Research, Inc. global boom-bust barometer of November 2015, the footnote on just one graph says, “Average of nearby price of Brent crude oil and CRB raw industrials spot price index times 2 and divided by 10.” Yeah, don’t ask me, I got lost after ‘Brent crude.’

Former analyst Henry Blodget likened economic forecasting to driving fast at night. He writes, “Thanks to your headlights, you can see what’s coming a few hundred feet in front of you, but you can’t see beyond that. And if you’re going too fast, by the time you see the unexpected curve or deer, it might be too late.”

What analysts and economists can do is look at some market indicators and tell us what probably will happen this year. And they’ll probably be right – probably. It’s like this: Every day you walk out the door down the same path to the pickup, with little variation.

You might stop to kick one of the kids’ soccer balls out of the way or step over a bicycle, but normally it’s just the usual walk to the pickup. You predict that every walk to the pickup will be uneventful. Then one day as you approach the pickup, bam – you fall flat on your face … out of nowhere. There you are with a black eye, skinned nose and bruised ego (these things never happen without someone seeing it).

The fall, which doesn’t usually happen, sometimes does. It’s like a recession or heightened economy swing – they don’t happen often, but they do happen. The problem is, we normally don’t see them coming.

In my own community this year, we will see the close of a local tractor and implement dealership as well as a food processing plant. And we’re in the heart of agricultural country, we’re an ag-friendly state, our economy hinges on agriculture.

These are long-time businesses with deep ties to the community and the hit to employees and farming contracts will be widely felt. I’ve read about and lived through many downturns in the market – even written about them – but I have to admit, I never saw this one coming. Not here.

What I think is helpful, is to have people inside the industry watching and assessing all angles. Robin Newell of S&W Seed Company does a good job of that, and I’ve asked him to once again tell us his observations (see article "Forage trends and prognostication 2016").

On the other hand, in a recent online poll our readers told us more weather-related apps were downloaded than any other kind of smartphone app. So there is one thing we can know with absolute certainty – no matter what happens, we can always blame the weather.  FG

Lynn Jaynes
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