Forecasting commodity prices using futures : the case of copper

This paper analyzes three forecasting methods for commodity spot prices and applies them to copper prices. The first method uses futures prices from either LME or COMEX. The second method uses analysts' consensus expectations, reported by Bloomberg. The third method jointly uses futures and analysts' expectations as inputs to a multifactor stochastic pricing model, with time-varying risk premiums that smooth its data using the Kalman filter. All three alternatives are compared with the well-known no-change forecast benchmark and with each other. The main finding is that analysts' expectations are a valuable source of data for forecasting copper prices. Also, when futures prices are relatively higher than spot prices, the model presented is the best alternative for forecasting copper prices at any horizon up to 24 months, and when prices are relatively lower than spot prices, the model is the best alternative for long-term forecasts and for LME futures prices for 1 to 12 months.