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Forecasting by dffhrtcv3


									  Chapter 6

 The Value of Forecasting
Forecasting future business conditions and
  consumer preferences is vital to the firm’s
  ability to achieve its purpose and objective
• 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
       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
        Cyclical Patterns
• Cycles are more prevalent in livestock
  (hogs & cattle)
• Changes in livestock production require a
  longer period of adjustment
     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
        Using Forecasts
• Understanding the assumptions behind the
• 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
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

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