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We aren't bankers or dairy insiders. We don't have expert knowledge or a secret oracle telling us the future. Instead, we're engineers and statisticians.
Trying to predict the Fonterra Farmgate Milk Price for the 2016/17 Season.
It's the probability that the final price will be greater than the dollar amount. For the farmers among you, think of it like a reliability score in a BW. Greater reliability means that we are more confident the final price will be greater than the dollar figure. A forecast of $5.00/75 means that we think there is a 75% chance that the final milk price will be greater than $5.00/kgMS. At the same time, we might also put out a forecast like $6.00/10. That means we think there is a 10% chance that the final price will be greater than $6.
It means we think there is an 80% chance the milk price will end up within that range. This means that 1 year out of 5 we will be wrong! For those of you who remember your statistics, they're our 10 and 90 percentile estimates.
Things are actually a little more subtle that that explanation. We really mean, "starting from this point in time, there is an 80% chance the milk price will end up within that range." Over the course of the season, the range will go up and down. It is just our best estimate at that specific point in time.
This may seem like us taking the easy route, but it's more about being honest. At the start of the year, we, and everyone else making forecasts, are likely to be wrong. So instead of telling you to expect $4.25, we're going to say "somewhere between $3.50 and $5.50". Over the course of the season, this range should get smaller as we get more confident of our prediction. Between $3 and $5 is a lot different to between $3.95 and $4.05!
It means we think there is an 50% chance that the milk price will end up smaller than that number and a 50% chance that the milk price will end up bigger than that number. For those of you who remember your statistics, it's our median estimate.
We are collecting information from a variety of sources including AgriHQ's Farmgate Milk Price Calculator, Nathan Penny's Rural Economic Notes for ASB, BNZ's Rural Wrap, Fonterra press releases, the daily settlement price of NZX's NZX:MKPFU17 futures contract and Westpac's Fortnightly Agri Updates. We also use the weighted average GDT auction price from Global Dairy Trade.