Prediction of Future Uniform Milk Prices in Florida Federal Milk Marketing Order 6 From Milk Futures Markets Academic Article uri icon


  • This study assessed the accuracy of 3 methods that predict the uniform milk price in Federal Milk Marketing Order 6 (Florida). Predictions were made for 1 to 12 mo into the future. Data were from January 2003 to May 2007. The CURRENT method assumed that future uniform milk prices were equal to the last announced uniform milk price. The F+BASIS and F+UTIL methods were based on the milk futures markets because the futures prices reflect the market's expectation of the class III and class IV cash prices that are announced monthly by USDA. The F+BASIS method added an exponentially weighted moving average of the difference between the class III cash price and the historical uniform milk price (also known as basis) to the class III futures price. The F+UTIL method used the class III and class IV futures prices, the most recently announced butter price, and historical utilizations to predict the skim milk prices, butterfat prices, and utilizations in all 4 classes. Predictions of future utilizations were made with a Holt-Winters smoothing method. Federal Milk Marketing Order 6 had high class I utilization (85 +/- 4.8%). Mean and standard deviation of the class III and class IV cash prices were $13.39 +/- 2.40/cwt (1 cwt = 45.36 kg) and $12.06 +/- 1.80/cwt, respectively. The actual uniform price in Tampa, Florida, was $16.62 +/- 2.16/cwt. The basis was $3.23 +/- 1.23/cwt. The F+BASIS and F+UTIL predictions were generally too low during the period considered because the class III cash prices were greater than the corresponding class III futures prices. For the 1- to 6-mo-ahead predictions, the root of the mean squared prediction errors from the F+BASIS method were $1.12, $1.20, $1.55, $1.91, $2.16, and $2.34/cwt, respectively. The root of the mean squared prediction errors ranged from $2.50 to $2.73/cwt for predictions up to 12 mo ahead. Results from the F+UTIL method were similar. The accuracies of the F+BASIS and F+UTIL methods for all 12 fore-cast horizons were not significantly different. Application of the modified Mariano-Diebold tests showed that no method included all the information contained in the other methods. In conclusion, both F+BASIS and F+UTIL methods tended to more accurately predict the future uniform milk prices than the CURRENT method, but prediction errors could be substantial even a few months into the future. The majority of the prediction error was caused by the inefficiency of the futures markets to predict the class III cash prices.

publication date

  • 2008-12-01