Forecasting in the Australian Lamb Industry: the Influence of Alternate Price Determination Processes

The purpose of this paper is to evaluate the influence of alternate price determination specifications on the ability of a structural econometric model of the Australian prime lamb industry to accurately forecast saleyard lamb prices. Five variations of this model were specified according to the manner in which the farm prices of lamb were assumed to be determined. and these were used to produce 12 quarterly dynamic price forecasts over 1991:1 to 1993:4. The results confirmed the importance of the assumed nature of the price determination process in influencing the model's solution and its subsequent ability to forecast farm prices. Based on the forecasts' mean squared errors, the preferred specification was one which incorporated a traditional market balance and an exogenously-determined farm-retail price spread. This preference remained following an additional forecast comparison in which the structural models' forecasts were combined with those of an ARIMA model. As such, this price determination specification has been shown to be most applicable to a market such as that for Australian lamb which exhibits relatively small stocks and exports and a stable domestic demand.