Mecardo Analysis - Getting real about percentile tables
- By: "Farm Tender" News
- Ag Tech News
- Sep 13, 2018
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By Michael Close | Source: MLA, AWEX, Mecardo.
A Mecardo subscriber contacted us, interested in the differences between nominal and deflated prices when creating decile tables for different commodities. So without fail, we looked into it and found the results quite intriguing.
Looking at the ESTLI, EYCI and the EMI since 2004, showed the deflated prices triumphing over the nominal prices by anywhere between 2 – 35%. This begs the question, should you be basing your decisions on deflated prices instead?
Let’s start with the basics.
Percentiles (or deciles) are a measure of how often prices have been above or below a particular level. They are a good tool for use in decision making, helping to estimate what may happen in the future by looking at what has happened in the past. For example, if a price is at its 56th percentile, it means that 56% of the time prices have been below the current price, therefore 44% of the prices have been higher.
This information allows more informed decisions to be made as it gives a brief snapshot of whether a market has more upside or downside, and indicates how much that potentially is. Nominal prices are the historic dollar value of a commodity and these are the values often used when performing analysis or creating reports, charts and presentations. However, nominal prices are not always the best representation of current day price values, particularly when price data spans a significant timeframe.
A more relevant measure of price when assessing over a longer period of time is the use of deflated price data. Deflated prices are calculated by converting the historical nominal price data using the quarterly inflation rates into current day dollar values. They are sometimes referred to as “real prices” and can provide a more accurate picture of value.
Tables 1 to 3 highlight the deflated price for the EMI, ESTLI and the EYCI, comparing to their respective nominal prices. Sheep and cattle producers only have a small window of opportunity to potentially sell off early or hold onto stock longer depending on the price, compared to a wool grower who has plenty of time to pick the correct price and put more money in the pocket. As a product, the quality of wool doesn’t deteriorate over time with storage. This allows for more opportunity to market as there is no race against the clock.
Let’s take a wool grower for example, the farmer has been offered a forward contract to sell at 1095 cents EMI, in nominal prices that would put him at the 70th decile using table 1, therefore only 30% of wool sold in the last 14 years has been more expensive than the price offered, more than likely the farmer would take that. But if we convert to a deflated price, it puts that price at the 39th percentile making it a whole new ball game.
Key points
* Percentile tables are a commonly used tool by producers and consumers to assess pricing strategy.
* The majority of percentile tables in publication use nominal prices.
* The use of deflated prices in percentile tables provides a clearer picture to the 'real value' of current prices and can improve decision making.
What does this mean?
Almost all categories analysed showed that the deflated prices were greater than the nominal prices by substantial margins. This tells us that producers who are using nominal price percentile tables as a decision-making tool for when to sell their product are doing themselves a disservice. The use of deflated price percentiles provides a clearer picture as to the “real value” in current day dollars and shows what percentile level and price point a producer should aim for in order to achieve a great result in inflation adjusted terms.
*Michael Close is a Marcus Oldham College Agribusiness student undertaking work placement at Mecardo. His family farm Merino sheep and Red Angus & Senepol cattle in Western Victoria.
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