FORMULA-DERIVED VERSUS OBSERVED MARKET PRICES: AN APPLICATION FOR SEGREGATED EARLY WEANED PIGS

A formula (the "K-State formula") for deriving the price of segregated early weaned (SEW) pigs using corn, soybean meal, and market hog prices was estimated based on equating return on investment for the different phases of swine production – farrow, nursery, and finish. USDA reported SEW pig prices were compared with prices derived from the K-State formula and several other common formulas. Based on root mean squared error and mean absolute error accuracy measures, the K-State formula did a better job of predicting spot-market prices than the other formulas. In terms of the K-State formula accurately predicting spot market prices, producers appear to form price expectations based on futures plus expected basis more so than simply futures prices or current cash prices. However, the manner in which the formula is used (i.e., method of choosing price expectations) will depend on the risk attitudes of the buyer and seller as well as the nature of their business relationship. Developing pricing formulas based on the framework outlined here (equal returns on investment) has merit for establishing prices in the absence of publicly reported information, however, it is important that users of the formula understand the conceptual framework of how and why it was developed.


Issue Date:
2001
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/36145
Total Pages:
18
Series Statement:
Selected Paper of the 2001 Annual Meeting, July 8-11, 2001, Logan, Utah




 Record created 2017-04-01, last modified 2017-08-25

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