A Simple Forecasting Trick

Everyone “knows” you can’t forecast commodity prices. Indeed, extremely precise forecasts are rare and probably impossible. However, it is more possible than most people realize to forecast commodity prices with a useful degree of reliability. Let’s use bleached hardwood kraft market pulp to illustrate.

Let’s first agree on what makes a forecast “useful.” Is the need short-term tactical or long-term strategic? If it is short-term tactical, then the timing and cyclicality of the price can be of great importance. Reliable short-term forecasting is in fact feasible but it requires sophisticated modeling and good input data.

We have such a forecasting technology in the Fisher-STE Market Pulp Model but it doesn’t fall into the category of this article’s title, “a simple forecasting trick” so I’ll only describe it briefly below. On the other hand, if one’s forecasting need is to support a long-term investment decision, the forecast’s main job is to predict the trend in the average price.

The amount of volatility and how it fluctuates over time probably doesn’t matter as much as whether the average price is trending up or down and how much.