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Commodity Prices, Producer Profitability And Spending​

The Opportunity

  • A producer of animal feed medications and vaccinations wanted to understand how livestock producers adjust their spending based on market conditions and estimate the impact on the upcoming year.

Our Approach

  • We focused on producer profitability in light of changing market prices and feed costs that evolve over time. We used time series regression models that are suitable for measuring impacts that can vary.

The Impact

  • The long-term trend analysis component of the model identified three distinct historical periods over the last nine years where the relationship between profitability and spending was distinct. In each of those periods we estimated an elasticity of the producers’ profitability with their spending.
  • A secondary output of the model was an estimate of the reaction time and recovery time as profitability declines or starts to increase again. Depending on the period, for example, reaction time ranged from two to five months.
  • With the forecast of the market prices in the coming year, which were expected to be lower, we were able to link them to profitability and thus estimate the impact of future spending.
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