Future world market prices of milk and feed looking into the crystal ball

Both the world milk price and the world feed price have become more volatile during the last 7-8 years. The ability of dairy farmers to adapt quickly to these changing circumstances will be a key driver for future success, considering that feed is the major cost component in milk production and that the milk market is highly volatile. This development has increased the need for research on price dynamics and price forecasting. The first aim of this paper is to apply the wavelet multi-resolution analysis (MRA) to investigate the cyclical dynamics embedded in and between the world milk and feed prices. Second, the aim is to explore both the long and short interactions and the impulse response functions (IRF) between the two price series in the system of a vector error correction model (VECM). Third, the aim is to produce reliable forecasts for both the milk and the feed price applying a SARIMA model, a VECM model and wavelet MRA. We collected the world milk price and the world feed price series from 2002 to 2015 from the International Farm Comparison Network (IFCN). The analysis revealed that the two price series contain business cycles of approximately 32 months. Further, the two series share a long-run relationship, they are co-integrated, with the feed price as the leading variable. The results also revealed that a combination of different forecasting models can provide reasonably good forecasts of both prices for a period of one year ahead.