Do Futures Forecast the Future?

A common presumption is that futures prices can predict future price, specifically the price during the last or delivery month of trading on a futures contract.This presumption has potential importance for both marketing and policy.Many crop insurance contracts use futures prices to establish their pre-plant and harvest prices.In addition, it is common to hear that futures prices should be used to forecast prices when evaluating the farm program choices in the 2014 farm bill.This article calls into question the presumption that futures prices can predict future price.It also finds that cash price performs as well as futures price in forecasting future price.Because of the technical nature of the analysis, the article begins with its summary observations.Readers can then decide if they want to read the details of the analysis. Summary Observations• A futures price provides an unbiased forecast of future price but forecast error is large.• A futures price provides no better forecast of future price than using last crop year's cash price.• Implication 1: crops with no futures market have no disadvantage in predicting future price• Implication 2: using futures prices to help determine the farm program choice in the 2014 farm bill offers no advantage over using the 2014 crop year average price• Implication 3: lack of a futures market is not a reason for not offering crop insurance; last crop year's average cash price works just as well as a forecast farmdoc daily