The Handbook of Commodity Investing

CHAPTER 15

Incorporating Futures in Commodity Price Forecasts

Chakriya Bowman, Ph.D.

Visiting Fellow

Australian National University

Aasim M. Husain, Ph.D.

Assistant Director, Middle East and Central Asia Department

International Monetary Fund

Although the share of primary commodities in global output and trade has declined over the past century, fluctuations in commodity prices continue to affect global economic activity. For many countries, especially developing countries, primary commodities remain an important source of export earnings, and commodity price movements have a major impact on overall macroeconomic performance. Hence, commodity-price forecasts are a key input to macroeconomic policy planning and formulation.

Forecasting commodity prices with reasonable accuracy is complicated by their considerable variability. Even the long-run trend behavior of commodities prices has generated debate, as typified by the important work of Cuddington,¹ who found little evidence to support the widely held Prebisch and Singer² view that prices of primary commodities were on a declining path over the long term. Cashin and McDermott³ find some support for small and variable long-run downward trends in commodity price data, although they also find that such trends are swamped by the consistently high volatility of commodity prices. More recently, the International Monetary Fund (IMF)⁴ observed that commodity prices relative to manufactures have stabilized in the last decade as the globalization ...