Why so keen to predict the future?

JON MORGAN
Last updated 14:38 14/06/2013

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OPINION: The news is all good for the rural economy, according to economists' crystal balls. But we all know how that can change.

The Primary Industries Ministry is the latest to give us its predictions. This is the ministry that last year was forecasting a slight check in growth this year on the reasonable assumption that we couldn't be lucky two years in a row.

Weatherwise, last year was one out of the box - at least for farmers. The wet summer-autumn wasn't appreciated by holidaymakers. But this year the gumboot was on the other foot. No need to tell you what happened.

To its credit, the ministry released in December last year an update to earlier forecasts, saying primary export revenue would be down $1.7 billion.

This week, it put the drought effect at $1.3b, so it wasn't far out.

The big imponderable for forecasters is the exchange rate. A year ago, the ministry had the US dollar at 80c for this year. Once again, it wasn't far out. Well done.

In previous years, the ministry has been wildly over-optimistic when it has looked five years ahead. But this year, with the drought still fresh in our minds, it is more circumspect.

In fact, uncharacteristically, caution appears to be economists' watchword at the moment. ANZ and Westpac have shown this in recent forecasts.

I can understand the urge to forecast the future - I would love my own personal Tardis - but I am baffled why economists do it. I suppose it is to do with helping their clients plan, and as long as it is based on sound data I suppose there's little harm in it. But we've seen lately how easy it is to get it wrong.

The ministry's report is hedged with warnings about the shaky world economy, and it uses the Treasury assumption that the US dollar rate will stay at the 83c to 85c level for the next two years. The ministry is also assuming weather conditions will return to normal. I suppose it has to - no use building in droughts and storms, even earthquakes, that might never happen.

But as we all know, statistics can be faulty. They're based on having the correct data in the first place. The ministry's report is slightly confusing in that it has two figures for total export revenue - for the year ending June 2014 it is predicting it to be $27.7b. But in its press release it says it will be $24.1b. Confusing matters further is a $30b figure used by minister Nathan Guy in his foreword to the report.

I asked about this, and was told $24.1b is the value for exports that are our core earners, and that we have hard data on, and $27.7b adds in peripherals like seeds, honey and animal feeds that have escaped the ministry's data collectors.

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The minister's $30b appears to be an optimistic upward rounding.

The core data are based on what the ministry can be pretty sure of, that farmers will continue to lift their game, helped by science. Cows will give more milk and sheep and cattle will be more fertile and raise meatier progeny.

There's a huge effort going into farming to do this, and I'm sure we will see results soon.

The ministry is predicting revenue to hit the $30b mark in 2015, and be touching $35b two years later. At that rate, it will be at the $60b mark demanded by the Government by 2025. We shall see.

The lion's share of the expected revenue increase will come from dairying. The ministry sees another $5b coming over the next four years, but makes no mention of what I think will be a drag on that - pressure to conform to higher environmental standards. But what do I know? I'm not an economist.

Westpac's forecasts are more for the short term, and it has lowered Fonterra's expected $7 milk price for the new year to $6.50, saying it expects an increase in milk flow to dampen international prices.

ANZ predicts $6.80 with a "positive upside", presumably meaning it could rise further.

On meat, our second-biggest earner, the ministry sees sheep and cattle numbers continuing to fall as dairying takes up more land but prices rising in key markets. Westpac and ANZ concur.

Taken overall, these reports present an impression of optimism, and there's no harm in that.

If something happens to upset that, such as a drought, tidal wave, earthquake, act of terrorism, nuclear war or alien invasion, you can be sure the crystal balls will be given a good shake, the required incantations muttered, magic wands waved and a new set of forecasts will appear.

- The Dominion Post

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