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FI Insights

Market Forecasts: Your Key to Effective Budgeting During Periods of Uncertainty

September 03, 2020

The economic downturn that has gripped the world since the onset of the COVID-19 pandemic has resulted in an extreme degree of uncertainty, which is clearly illustrated in “the VIX”—the Chicago Board Options Exchange's Volatility Index. Investors often use the index as a gauge of fear and its 52-week range has demonstrated plenty of volatility, vacillating between $11 - $85.

The last time the VIX demonstrated these levels of instability was at the peak of the Great Recession of 2008.

Business leaders who successfully navigated that event understand the importance of making capital improvements during boom cycles in preparation for surviving the unexpected during bust cycles; it’s good business sense. But COVID-19 has triggered a series of unique challenges and new questions:

  • How has the shutdown of the global economy changed supply/demand relationships?
  • Have there been structural shifts in long-term buying habits?
  • What trade and policy changes are developing as a reaction, and what are the near- and long-term implications for supply chains?
  • What impact will the shifting value of the US dollar have on the future business environment?
  • What is the Federal Reserve’s next move to stave off calamity, and what effect will it have on my business?

Finding reliable answers to these questions requires objective planning grounded in internal and external business intelligence. Doing this effectively is no small feat, however, which is why forecasting is so important in the current economic environment and, especially during budgeting season.

Adapting in Dynamic Markets

Market sea-changes like those we have experienced over the last several months have echoed throughout the global economy. The most obvious example is in the very nature of how we conduct business, which has changed dramatically in 2020 as social distancing and remote work have become the norm. A recent article in Human Resources Executive notes: “New data finds that 82% of company leaders surveyed by Research firm Gartner say their organizations plan to permit employees to work remotely at least part of the time even after the COVID-19 pandemic. What’s more, nearly half (47%) say they intend to allow employees to work remotely full-time going forward.”

This change is poised to devastate commercial and residential real estate markets around the globe—a shift that will send shockwaves throughout the entire economy. And while many saw the change coming, who knew how swiftly it would take effect? The white-collar work world has been moving in this direction for the last decade, so it’s not surprising a pandemic accelerated the trend.

While this trend is unlikely to impact the manufacturing segment in the near term, maintaining profitability in periods of stress still requires that manufacturers and their suppliers rationalize production during the stress while sensibly planning for the future. This is the time when preparation and forecasting pay dividends.

Forecasting

Forecasting with a high degree of accuracy is a complex procedure, but a reliable forecasting model must take both global and local events—and the interplay between the two—into consideration. To build such a model, Forest2Market, Fisher International and Tecnon OrbiChem have developed unique approaches that account for a comprehensive view of the market forces that influence price performance.

This allows us to uncover statistically significant correlations between pricing data, the economic indicators that affect demand (GDP, housing starts, etc.) and events that affect supply. We incorporate the future supply/demand scenarios and other applicable macroeconomic factors in order to develop the most likely outcome. The model fits all of these things—including the global and local dynamics—together to determine how and when prices will respond to changing influences.

A business forecast built on our robust, price-based datasets and business intelligence allows for greater accuracy because it is designed from a reliable, precise starting point. Rigorous, mathematical models are the tools needed to gain strategic advantage, operate efficiently, and increase profits, and we leverage these tools to provide the most comprehensive price-based forecasts in the forest products value chain.

At the raw materials level, our forecasts enable customers to:
  • Better optimize raw material procurement – both volume and price
  • Manage inventory more effectively
  • Align feedstock and output with raw material price trends
 
At the manufacturing level, our forecasts are designed to:
  • Predict price turning points - not just price levels
  • Perform sensitivity analysis, testing proposed strategic plans against real market dynamics
  • Explain market movements in verifiable, fact-based, common-sense terms
 
At the operational and strategic levels, our forecasts are used to assist:
  • Purchasing & planning (buy now or await market developments?)
  • Sales strategy (maximize now or hold back for a market upturn?)
  • Production planning to optimize the gap between price vs. cost
  • Inventory management to properly time drawdowns or build ups
  • Budgeting (monthly and yearly)
  • Optimizing cash flows and balancing future input costs vs. revenues

These forecasts enable participants in the forest, wood products, chemicals and polymers supply chains to respond confidently to market changes while assuming a comfortable level of risk. Using a forecast model that can maximize return and minimize risk is simply smart business, especially during times of uncertainty.

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