Washington, DC
August 23, 2007
A statistical model to forecast
season averages of international cotton prices has been
identified by the ICAC Secretariat. The 2007 model explains 88%
of the annual variation since 1975 in the Cotlook A Index, an
indicator of international prices. The 2007 model succeeds an
earlier model first developed in 1988 and revised several times.
The 2007 model will assist the Secretariat in developing
improved forecasts of cotton prices.
A report detailing the econometric work and data used in
developing the ICAC 2007 Price Model is available at
www.ICAC.org and is being
published in the July/August issue of COTTON: Review of the
World Situation.
Net trade in cotton by China (Mainland) was used as an
explanatory variable in the 1988 ICAC model, and as imports by
China (Mainland) rose in recent seasons, the prices indicated by
the model were substantially above realistic levels in 2005/06
and 2006/07. The 2007 model relates changes in the Cotlook A
Index to changes in the stocks-to-mill use ratio in the
“World-less-China” and to past changes in the stocks-to-mill use
ratio in the “World-less-China” and “China”. Splitting the world
into two regions (“China” and “World-less-China”) provides
better explanatory power than considering the world as one
region.
According to the 2007 model, a 5% increase in the stocks-to-mill
use ratio in the World-less-China results in a decrease of 4.9%
in the season-average Cotlook A Index during the same season. If
the stocks-to-mill use ratio in the World-less-China continues
to increase by another 5% in the following season, then the
combined effect of the two-season increase in the stocks-to-mill
use ratio in the World-less-China is expected to reduce the
season-average Cotlook A Index by 6.6%.
The stocks-to-mill use ratio in China has a lagged effect on the
Cotlook A Index. When the China stocks-to-use ratio increases by
5%, the average Cotlook A Index in the next season decreases by
0.36%.
To evaluate how well the model would have predicted prices in
the past, one-season-ahead price forecasts were simulated with
information at the end of each season for the seasons 1990/91 to
2006/07. With perfect foresight of the stocks-to-mill use ratios
in the World-less-China and China, the model would have
correctly predicted price increases and decreases in all cases.
The average absolute difference between the forecast with
perfect foresight and the observed Cotlook A Index amounts to
4.8 cents per pound.
On the other hand, if historical forecasts of the stocks-to-mill
use ratio are used instead of the actual ratios, price increases
and decreases would have been correctly forecast 11 out of the
17 seasons, and the average absolute difference between the
historical forecast and the actual Cotlook A Index amounts to
9.5 cents per pound.
Beginning in 2007/08, forecasts of the Cotlook A Index will be
revised monthly based on a weighted average of the observed
values of the Cotlook A Index during the current season and the
latest annual forecast for the remainder of the season.
The International Cotton
Advisory Committee is an association of 44 governments of
countries with an interest in cotton. The Secretariat of the
Committee publishes information related to world cotton
production, supply, demand and prices, and provides technical
information on cotton production technology. Detailed statistics
are found bimonthly in COTTON: Review of the World Situation,
$170 per year via email, $200 per year in hard copy. A monthly
outlook is available by email for $265 per year. Access to the
latest weekly estimates of world cotton supply and use by the
Secretariat is available on the Internet for $420 per year. |
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