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Chapter 6 Forecasting The Value of Forecasting Forecasting future business conditions and consumer preferences is vital to the firm’s ability to achieve its purpose and objective because: • Forecasting helps a business place itself in the best possible position relative to future business conditions • Forecasting reduces the uncertainty surrounding business decisions and increases profits The Basics • Forecasts of future levels of major economic variables: GDP, interest rates, income, consumption rates, and so on are easy to find • These forecasts become valuable to an agribusiness if they can be related to the firm’s sales, profits, costs, and so on The Five Factors of Forecasting 1. Accuracy desired 2. Time permitted to develop the forecast 3. Complexity of situation 4. Time period to be projected 5. Amount of resources available (e.g., money, personnel) Forecasting Procedures Extrapolation: forecasting by using the idea that whatever happened in the past will happen again in the future. Graphical analysis: extrapolation is combined with graphical analysis and the plotting of data (figure 6-1) Adjusting for Inflation • Deflate or remove the effect of inflation from the price • To adjust for inflation is accomplished by dividing the price by an appropriate general price index calculated for the same period (table 6-1 and figure 6-2) Adjusting for Population • Remove the impact of changes in population by measuring sales on a per person (per capita) basis • Adjusting for population is done by dividing sales by population (table 6-2) Moving Averages • Moving averages help reduce the impact of short-term fluctuations in the data by plotting the average value of several data points rather than a single one • Examples: table 6-1, figure 6-3 Identifying Seasonal Patterns Seasonal patterns of prices and quantities: The lowest price at harvest time, followed by a slow rise each month throughout the rest of year, followed by a decline just before the next harvest. Identifying Cyclical Patterns • Cycles are more prevalent in livestock (hogs & cattle) • Changes in livestock production require a longer period of adjustment Combining All the Adjustments • Combine several of the forecasting procedures to make a projection • Reassemble the parts in order using the price data from the most current year, the trend line, and seasonal and cyclical pattern information Using Forecasts • Understanding the assumptions behind the forecast • Update forecasts • Use alternative outcomes Discussion Topics 1. Discuss why a huge global agribusiness firm such as Coca-Cola has a greater need for good forecasting than a local, independent farm supply store. Which firm is at greater risk to changes in the market? 2. Explain how forecasting is related to the planning management function. 3. Explain how an agribusiness knowing next year’s projected gross domestic product can help it decide how much inventory to buy. Discussion Topics 4. Discuss the idea that forecasting is too complicated and expensive for a small agribusiness to afford. Explain why you agree or disagree with this statement. 5. Explain why graphical analysis should be a part of all forecasting efforts. Develop an example that proves your points. 6. Explain why it is important to be able to remove the effect of inflation, population changes, and other items from a forecast. Discussion Topics 7. What is the difference between seasonal and cyclical patterns? Why are these things more important to agribusiness than other industries? 8. Discuss how a poultry processor can use a monthly price to his or her advantage in buying, selling, and storage decisions. Discussion Topics 9. Evaluate the statement that the best forecasts are those that you can directly apply to business planning. Explain your answer. 10. Evaluate the statement that the use of alternative outcomes in forecasting helps agribusiness managers sleep better at night. Explain your answer.
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