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FORECASTING THE PRICE OF

CORN IN THE PHILIPPINES

A Thesis Proposal
Presented to the Faculty of the
Allied Business Department
College of Business Administration and Accountancy
De La Salle University-Dasmariñas
Dasmariñas City, Cavite

In partial fulfillment
of the requirements for the degree of
Bachelor of Science in Business Administration
(Major in Economics)

BILLY JULIUS M. GESTIADA

March 3, 2017
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CHAPTER I

INTRODUCTION

Corn is the second most bountiful crop grown all over the world, and many

people have been consuming this for everyday living. It is a multifaceted crop, and there

is no wasted part on its plant. In Mexico, corn husks are made into their traditional

tamale. Kernels are converted into food. Animals feed on the stalks, and the corn silks are

made into herbal teas. Some food products like corn oil, corn meal, corn sweetener, corn

syrup, and even corn whiskey are made from corn. (Sailer, 2012)

In the United States (US), even if the farmers are capable of growing different

kinds of grains and crops and bringing them to the market, corn accounts for 90 percent

of all the produced grain. In 2015, about 80 million acres of farmland are being planted

with corn, and the world is being supplied with 20 percent of the American corn. While it

is true that the US is maintaining its current reputation as an international exporter of

corn, what remains from these corns is not entirely wasted. Given that corn is the primary

crop grown in the US, every man, woman, and child consumes four pounds of corn a day,

which amounts to a total of more than 1,500 pounds of corn consumed annually.

(NathanF, 2015)

Even though the US is considered to be the largest exporter of corn in the world,

less than 15 percent share of the demand for the US corn is accounted by the exports,

which is actually small. This occurrence has something to do with the demand-and-

supply-relationship of corn, resulting to the other markets adjusting to the US market’s

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current price. Because of this internationally tough competition, farmers plant their corn

after considering the size of the US crop in order to have a market advantage over the

short US crops. In fact, some countries like Brazil, India, and South Africa had significant

corn exports when international prices are competitive, or the crops are large. (United

States Department of Agriculture Economic Research Service [USDA ERS], 2017)

In many countries, particularly the developing ones, commodities still remain a

reliable source of export earnings. Moreover, price movements of these commodities play

a major role on overall macroeconomic performance. Commodity-price forecasts are

essential in formulating and planning macroeconomic policies. (Bowman and Husain,

2004)

These studies mentioned above are only a very small portion of numerous studies

done on commodity prices. In the field of economics, this kind of study is not something

new. The efforts of the previous researchers contributed a lot to the present knowledge of

commodity prices.

Background of the Study

A study was conducted by Halonen (2016) showing that there are few statistical

techniques that can outperform models that pertain to supply and demand analysis in

forecasting the price of corn in the US. The researcher argued that there are some

econometric techniques that are costly to use, none of them of being more costly than the

supply and demand analysis. The main reason for this much expense is that supply and

demand analysis involves gathering and summarizing a large amount of information

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regarding supply and demand. Furthermore, it also requires extensive surveys to be

distributed to a large sample in a particular study. That being the case, this study

examined if there are some statistical methodologies that can provide forecasts at least as

accurate, or even not as costly as the models incorporating supply and demand analysis.

Both the statistical methodologies and the supply and demand models were evaluated at

one, three, six, nine, and twelve month horizons, given that these horizons are suitable for

analyzing commodities that involve buying, selling, production, and contract

negotiations. It was found out that an AR model is the best model to use in forecasting

over a short horizon, while VAR model is the best model to use in forecasting over a long

horizon, over six months.

Another study pertaining to forecasting the price of corn, along with other 14

commodities, has been conducted by Bowman and Husain (2004). The research analysed

the performances of three different types of commodity price forecasts namely:

judgment-based, historical price-based, and commodity futures-based. Since spot prices

tend to move forward future prices for most commodities in the long run, and the future

prices showing lower variability, it was found out that commodity futures-based model

outperforms both the judgment- and historical price-based models in directional terms, at

the very least.

Aside from the mentioned three different types of commodity price forecasts

above, Jha and Sinha (2013) conducted price forecasting on soybean and rapeseed-

mustard wholesale prices in India using neural network model. The researchers stated that

the innovation of Artificial Neural Network (ANN) proved to be feasible given the data
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provided by developing countries. In this study, ANN indicated more significant number

of future price changes as compared to linear model. This means that in the context of

commodity price forecasting, where turning points are crucial, ANN model might be

preferred because it totally outperforms nonlinear models most especially when the series

is linear. Lastly, even if the series is nonlinear, combining linear and nonlinear models

was observed to perform better than these two models performing independently.

Although there have been many papers done in other countries pertaining to

models used in forecasting the price of corn, not much is done in the Philippines. This

paper will focus on providing an econometric model in forecasting the price of corn in

the Philippines.

Statement of the Problem

Commodity price forecasting is an essential part of any industry involving trading

and price analysis. Commodity prices are often unpredictable that becomes even highly

unpredictable when you factor the presence of natural calamities droughts, typhoons,

floods, and pests. Because of this, there’s a greater risk and uncertainty in formulating a

forecasting methodology. In the case of the Philippines, where rice and corn are the major

crops, policy makers should see to it that they make reliable, highly accurate forecasts of

rice and corn prices in order to ensure food security, thus somehow alleviating hunger

and poverty. Farmers will also benefit from commodity price forecasting because they

will definitely want to make their production and marketing decisions wisely so that they

will be able reap positive financial outcomes in the future. (Jha and Sinha, 2013)
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Another problem in conducting a commodity price forecast is the volatility of

prices over time. A study regarding commodity price forecast resulted in forecast prices

increasing rapidly, and in the long-run becoming larger due to a spike in futures prices.

This resulted to a lower accuracy of the forecasts. It was also mentioned in the study that

in order to improve forecast accuracy, dummy variables may be used to adjust for price

spikes. Technically, it can be observed that there is a need to compare forecasting models

with the other models to ensure that a proper model is used in a proper scenario.

(Bowman and Husein, 2004)

Another study dealt with the problem of short-term market price forecasting. Time

series analysis is usually used in dealing with this problem. Furthermore, ANN, a new

technique, has been discovered as a tool in price forecasting. In this study, ANN model

has been compared with the time series autoregressive integrated moving average

(ARIMA) in forecasting the price of tomato from years 1996 to 2010. The results showed

that ANN model performed better than ARIMA model in terms of their relative errors.

(Li, Xu and Li, 2010)

Corn is second to rice as the most important crop in the Philippines, and yet the

studies done regarding forecasting the price of corn in the Philippines are very few. We

can only see studies done about the pricing behavior of Philippine corn, relationship

between trade liberalization and Philippine corn prices, relationship between the prices of

Philippine rice and corn, socio-economic impact of corn in the Philippines, etc. Basically,

these studies only present behaviors, relationships, performances, impacts, etc. Like in

the other countries, it is important to emphasize methodologies for the improvement of

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forecasting of the price of corn in the Philippines in order to aid both the producers and

consumers in making sound decisions. Specifically, this study answered the following

questions:

1. What is the trend of the price of corn in the Philippines over time?

2. How well does Autoregressive Integrated Moving Average (ARIMA) model perform

in forecasting the price of corn in the Philippines? and

3. How well does autoregressive (AR) model perform in forecasting the price of corn in

the Philippines?

Objectives of the Study

Generally, this study aimed to provide a forecast on the price of corn in the

Philippines. In order to carry out the general objective in a more organized and systematic

way, the following specific objectives were made:

1. To describe the trend of the price of corn in the Philippines over time;

2. To analyze the price of corn in the Philippines using ARIMA model; and

3. To investigate the price of corn in the Philippines using AR model;

Hypotheses of the Study

Dash, Solanki and S. (2012) conducted a study in India regarding commodity

market behavior, price and its factors. Included in these commodities are the three agro-

products, namely: channa, wheat and pepper. The main factor that affects the prices of

these crops, in terms of supply and production, is the monsoons. These crops are also

affected by storage constraints that are temporary. Other factors include inflation, supply
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constraints, costs of production, foreign exchange holdings, and some international

policies pertaining to imports and exports. Thus, in order to carry out the study more

properly and systematically, the researcher hypothesized that:

H1: Commodity prices are generally nonstationary.

In a study conducted by Wang and Tomek (2004) regarding commodity prices and

unit root tests, it was found out that commodity prices are generally treated as stationary.

However, unit root tests prove that commodity prices are generally nonstationary, most

especially when the test specification does not account for structural changes.

H2: There is an upward trend in corn prices.

The European Central Bank (2014) reported on its July Monthly Bulletin that

commodity prices (oil and food) had an upward trend despite of being interrupted by a

financial crisis in 2008.

H3: Farmgate prices, rather than wholesale or retail prices, should be the primary

concern of forecasting the price of corn in the Philippines.

Okunmadewa (n.d.) explained that despite of the farmers giving their best effort

in producing crops or livestock, they tend to get the least out of it when it comes to

selling the products in the market. This is the same with forecasting the price of the corn

in the Philippines. This paper would like to focus on the farmer’s side, whose efforts are

much more rigorous compared to the consumers, rather than the consumer’s side.

H4: ARIMA Model is an efficient tool in forecasting the price of corn.

Jadhav, Reddy and Gaddi (2017) conducted a study on the application of ARIMA

Model for forecasting the prices of paddy, ragi, and maize (corn) in India. The results
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showed that ARIMA Model is a powerful tool in forecasting commodity prices.

Furthermore, the research checked the validity of the model using the values of MSE,

MAPE, and Theil’s U, and these values indicated that the forecasted values are almost

similar to the actual values. Lastly, one of the limitations of the ARIMA Model is that the

time series should be long, which makes the said model really suitable in forecasting the

price of corn in the Philippines.

Significance of the Study

This study compared the performances of both AR model and ARIMA model in

order to determine the model that is flexible enough to the volatility of corn’s prices in

the Philippines.

The government, most especially the policy makers, this impacts their decision as

to how they are going to forecast the price of corn in the Philippines. Given the

uncontrollable circumstances that could negatively affect the commodity prices, it is

better to have many alternative models that could fit the scenario given certain factors.

The farmers are guaranteed to benefit on this study as they will be guided on what

decisions should be made in the future in order to be financially stable. Having a reliable

commodity price forecasting method to account for yields will be very helpful. Though

farmers are considered starving and dying in the Philippines, the opportunity to receive

financial incentives in the future is always there for as long as they are willing to grab it.

The students should be able to learn the value of food security in the long-run as

early as possible. In response to this, through this study, they will learn that commodity
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price forecasting is not simply about being able to understand numbers and figures, but

by those figures and numbers, policies can be derived in order to secure food in the long-

run.

This study could be further improved by the future researchers who will be

conducting a research similar to this. The fact that this study only has one variable, it

might be better for the other researchers to come up with models, aside from the

commonly used ARIMA and AR models, which could easily deal with univariate analysis

while also looking into the effectiveness of their performances as well.

Scope and Limitations

This study covered the prices of corn from 80 provinces/cities including Metro

Manila, the same with the provinces/cities covered by the Philippine Statistics Authority

(PSA).

This study is limited only to the data available at PSA as the said organization has

the wholesale, retail, and farmgate prices of corn in the Philippines. This follows the

assumption that the data provided by PSA are all accurate.

This study is limited only to the use of two models, AR and ARIMA. This paper’s

main model will be ARIMA while AR will only be a model for comparison.

The data that used in forecasting the price of the corn in the Philippines is only

from 1960 to 2016 because the data from these years are still available and accessible

through the data sources of this study.

Definition of Terms
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Commodity Price refers to the wholesale, retail, or farmgate price of crops such as rice,

corn, sugar, cassava, vegetables, fruits, and rubber, which could be either

wholesale or retail.

Corn or yellow corn specifically is the second most important crop in the Philippines,

and is the main subject of this study.

Farmgate Price means the price of corn set by the producer itself. It is also termed as the

producer price.

Forecasting is the method used in this study that uses historical prices of corn in order to

generate policies and recommendations pertaining to food security and valuation

of corn prices in the Philippines.

Price refers to the farmgate prices of corn in the Philippines, and is one of the main

variables used in this study.

CHAPTER II

REVIEW OF RELATED LITERATURE

This chapter discussed some past researches conducted that are related to this

study. This chapter also critically evaluated and analyzed the studies that have been
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conducted before, which enabled the researcher to create a foundation for the study.

Through the help of review of related literature, the researcher determined what has been

discussed by the previous studies so far, and what has not yet been discussed that can

serve as a research gap. This chapter focused on the previous researches done on

forecasting the price of commodities. This chapter, review of related literature, discussed

previous studies conducted relating to impact of commodity prices to the economy,

determinants of commodity prices, and commodity price forecasting.

Impact of Commodity Prices to the Economy

Sands (2015) stated that fluctuations in commodity prices affect the entire

economy in terms of employment, public and private expenditures, and capital

accumulation. When the prices fluctuate down, the rate of return of commodity sectors

exceeds that of the non-commodity sectors. In addition, a lot of economic problems arise

whenever economies rely on commodities as the main component of their Gross

Domestic Product (GDP). Because of this, we see a shift from commodity sectors into

productive non-commodity sectors. Brazil is said to be one of the major commodity

exporters all over the world, and it has its own major stocks as well. However, a

commodity deflation has been experienced at around April 2015, which forced Brazil’s

majors stocks to give negative returns. The researcher then concluded that in order to

adjust to lower commodity prices, two steps under fiscal policy can be undertaken. First

is for the government to reduce taxes to increase household spending. Last is to handle

both unemployment and the investment cycle by investing in other productive assets.
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An Australian economist said that it can be challenging on the part of a researcher

to analyze how commodity products are likely to impact both the customers and the

whole economy. The researcher further explained that one of the pressing issues

concerning commodity markets is the dramatic declines in the industrial commodity

prices such as iron-ore and oil. Basically, the study showed how this scenario would

impact both the global and Australian economies. For the global economy, a fall in oil

prices will have significant implications for oil importers and exporters, consumers and

governments. In this case, Russia and Organization of the Petroleum Exporting Countries

(OPEC) countries, which rely heavily on oil revenues to fund their government

expenditures, will lose a lot during heavy price decreases of oil. Although affiliated

companies such as energy-mining companies and the like will be negatively affected, a

lot of countries will still benefit. In fact, industries that have higher input costs on oil will

have free cash flows, and will be able to operate at higher margins. As for the Australian

economy, the results showed that the impacts will most likely be seen in inflation and

interest rates in the short-run. (Oster, 2015)

An agricultural sector becomes successful provided that it supports economic

growth. The US has a strong economy in terms of agriculture. American farmers are

capable of producing vegetables, fruits, grains, meat, and dairy products at a low cost. As

a result of this, domestic food supply becomes safe and secured. Furthermore, through

modern technology, the American agriculture sector is capable of producing biofuels and

other sources of alternative energy in order to minimize dependence on foreign oil. This

helps to reduce the costs incurred by the businesspeople and consumers in purchasing gas
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or oil. Finally, it is truly important for rural areas and small towns to have a strong

agricultural economy. In fact, farmers and ranchers give full support to farm industries,

and they purchase local goods and services, which results to an increased production.

This high level of production has contributed a lot to the businesses given that a strong

agricultural economy exists. (United States Congress Joint Economic Committee [JEC],

2013)

Determinants of Commodity Prices

There has been a vast study regarding both short- and long-term determinants of

commodity prices. Over the years, studies pertaining to this topic become more prevalent.

Good (2008) conducted a study on the factors affecting corn and soybean prices. The

researcher stated that the agricultural commodities have been influenced by the change of

value of US-Dollar which has a negative relationship for both the corn and soybean

prices. Changes in crude oil prices are considered to affect both the corn and soybean

prices negatively. News pertaining to exports also affects both corn and soybean prices.

Weather is an important factor to every agricultural commodity, corn and soybean

included. Another important factor is production as it is highly related with weather.

Finally, the developments in the financial markets have positive effect on corn and

soybean prices. Similarly, any weakening of those markets will have a negative effect on

both commodities.

Similar to the study conducted by Good (2008), in a macroeconomic perspective,

the determinants of agricultural commodity price volatility include the following: (1)
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stocks that has a negative relationship with price volatility ; (2) Southern Oscillation

Index (SOI) that has a positive relationship with price volatility; (3) world market

structure that has a negative relationship with price volatility; (4) biofuel production that

has a positive relationship with price volatility; (5) Kilian index; (6) crude oil price

behavior that has a positive relationship with price volatility; (7) US-Dollar exchange rate

volatility that has a positive relationship with price volatility; (8) US interest rate that has

a negative relationship with price volatility; (9) the Scalping index; and (10) the Working-

T index. The performances of Generalized Autoregressive Conditional

Heteroskedasticity-Mixed-data Sampling (GARCH-MIDAS) and GARCH(1,1) were

compared, which GARCH-MIDAS always performed better than the other model. This

analysis was applied and tested for wheat, corn, and soybean. (Dönmez and Magrini,

2013)

Adeyanju (2014) argued that corn has been an important food to the entire human

race. However, more than just a food source, corn has also become an important fuel

source. Thus, the researcher enumerated the top factors that either increase or decrease

the price of corn. First is the effect of Ethanol, which comes from corn. Given that an

increase in the demand for ethanol would increase the demand for corn, which will surely

increase the price of corn. However, when the demand for ethanol decreases, decreasing

the demand of corn, it is not necessarily equal to the effect of increasing demand for corn

given that only 40 percent of corn becomes ethanol. Another factor is the crude oil prices

which has a positive relationship with corn prices most of the time. This is because even

corn has been functional as an energy commodity as well. Next is the speculator effect,
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which is considered to be the biggest driver of corn prices. Naturally, it will be smart for

investors to observe how corn is being valued before taking any actions. Climate is a very

important factor of corn included. Another important factor, though not as significant as

the other factors, is the Chinese effect. China is said to be taking efforts to have a cleaner

energy, therefore there will be an increase in demand for ethanol, which will most likely

contribute to an increase in demand for corn. Finally, geopolitical issues play an

important role in the corn since corn production is unevenly distributed worldwide.

Technically, a change in economy affects corn industries.

Commodity Price Forecasting

There were a lot of researches done on the forecasting of commodity prices using

different econometric methods. Most researchers generally use either ARIMA model, or

VAR (Vector Autoregressive) model, for multivariate studies, or AR, for univariate

studies, in commodity price forecasting. In fact, Tripathi et al. (2014) conducted a study

in India regarding rice productivity and production using ARIMA models. The paper

focused on the analysis of trend of rice area, production, and productivity of Odisha as

compared to India using data from years 1950 to 2009. It also focused on forecasting the

rice area, production, and productivity using ARIMA models. It was found out that there

is an increasing trend in productivity and production for both India and Odisha, with

Odisha having a lesser rate of increase than India. The researchers believed that it is

because of the low input in agricultural operations and other biotic and abiotic factors.
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Overall, it was proved that ARIMA model can be successfully used to forecast rice area,

productivity, and production for both Odisha and India in the coming years.

In a study pertaining to forecasting major fruit crops productions in Bangladesh,

Box-Jenkins ARIMA model was used. The study aimed to fit the Box-Jenkins ARIMA

model in forecasting three of the major fruit crops in Bangladesh namely: Mango,

Banana, and Guava. It was found out that for Mango, the best chosen Box-Jenkins

ARIMA model, accounting for more than 5% level of significance, is ARIMA(2,1,3); for

Banana, it is ARIMA(3,1,2); and for Guava, it is ARIMA(1,1,2). The researcher

concluded that given that these three models are capable of practically explaining the

situation, they are the best model to use in forecasting. The researcher further

recommended that these models can be used for decision-making by the researchers,

policymakers, businessmen, etc. Finally, this study concluded that Box-Jenkins ARIMA

model performs good in short-term forecasting. (Hamjah, 2014)

In addition to the usage of ARIMA model in forecasting commodity prices of

various places and periods, other researchers have forecasted commodity prices using

regime-switching models, which this paper will also use in forecasting the price of corn

in the Philippines. Ubilava and Helmers (2011) conducted a study regarding the impact of

El Niño Southern Oscillation (ENSO) – a natural phenomenon characterized by wind

variations and changes in sea surface temperature – on predicting world Cocoa prices.

The researchers contributed to the previous knowledge of commodity price forecasting

by considering that a nonlinear causal relationship between ENSO and world Cocoa

prices would be possible to compare the performances between linear and nonlinear
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models. The smooth transition autoregressive framework (STAR) model, the model used

by the researchers, and is under the regime-switching models, proved that nonlinear

models are more reliable in out-of-sample forecasting compared to linear models.

Furthermore, the study concluded that there exists a Granger causality between ENSO

and world Cocoa prices.

The STAR model was also used in forecasting Corn and Soybean basis using

regime-switching models, a study conducted by Sanders and Baker (2012). In this study,

it was stated that producers of corn and soybean in the core production areas in the US

have noticed a great increase in the volatility of prices in their recent years, which

resulted to an increase of price risk of producers in decision-making. This paper aimed to

apply regime-switching models to formulate a model that could adjust to the prices’

changing volatilities, and to provide more accurate forecasts especially in periods of

changing volatilities. The researchers found out over the course of their study that time

series econometrics perform better at short-term forecasting, but difficult to use in long-

term forecasting. Finally, the study concluded that regime-switching models do not

provide real forecasting improvement over ARIMA models despite of statistical

significance in favour of the regime-switching models.

This paper focused on forecasting the price of corn in the Philippines. The

previous studies that have been presented in this section clearly explained the need to

forecast commodity prices in various places, as well as how these commodity prices will

have an impact on the economy. Through these past studies done by different researchers,
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this paper was able to contribute additional knowledge in commodity price forecasting by

formulating a methodology that will forecast the price of corn in the Philippines.

CHAPTER III

FRAMEWORKS OF THE STUDY

Theoretical Framework
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The previous chapters of this study have mentioned some among the numerous

studies done on commodity price forecasting models. As mentioned in the Chapter II of

this study, among the most used models by the researchers when dealing with commodity

price forecasting are ARIMA and AR/VAR models. Though not as common as the

previous mentioned two models, there are still a lot of models that can be used in

forecasting commodity prices as they will have their own importance depending on the

scenario.

Judgmental Forecasting. This a forecasting method which relies on a person’s

own judgment of a particular situation. It is naturally expected to be subjective because it

does not rely on historical and other statistical data, which means that it can only be used

on qualitative researches. Hillier, F. S. and Hillier, M. S. (2001) enumerated the

commonly used judgmental forecasting methods, namely: (1) manager’s opinion which

relies on a single manager’s best judgment in forecasting; (2) jury of executive opinion

that is similar to the first one, except now that there is a small group of managers who

combine their best judgments; (3) sales force composite which is often used by the

companies when they want to generate higher sales by hiring sales forces; (4) consumer

market survey that relies on surveying actual or potential customers in order to determine

their responsiveness to the new products or new features of the existing products; and (5)

Delphi method which involves a group of experts from various locations independently

filling out a series of questionnaires.

Unit root model. The unit root problem is demonstrated when the presence of unit

root in a time series affects statistical inferences due to some vague, unpredictable
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patterns. The solution provided to this problem is the unit root testing which ensures that

the time series is stationary, that is the statistical properties do not change over time.

Some commonly used unit root tests include, but not limited to, the Dickey Fuller Test,

Augmented Dickey-Fuller (ADF) Test, and Phillips-Perron (PP) Test. The unit root model

with trend and drift is the simplest form of forecasting model, and it can be written as:

yt = µ + yt-1 + ut,

where yt is the natural logarithm of the commodity price at period t, and the error term, ut

is assumed to be a white noise.

ARIMA model. The ARIMA model was first introduced by the statisticians

George E.P. Box and Gwilym M. Jenkins and thus being commonly known as Box-

Jenkins model which is used as a forecasting model. This is probably the most commonly

used model in forecasting commodity prices, and is also the most commonly used model

in forecasting other prices given that it can convert non-stationary time series data in to

stationary time series data using differentiation.

The equation for ARIMA model in a stationary time series analysis is a linear

equation, which can be expressed as:

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Futures Forecast Model. The futures price is one way of forecasting commodity

spot prices. Mckenzie and Holt (1998) and Chinn and Coibion (2010) stated that the

futures price is an unbiased predictor of future spot prices, and there is a little evidence

that it is also the best forecast according to Alquist and Kilian (2010) and Alquist et al.

(2011). Despite of a large literature proving that the capacity of futures price to forecast

exceeds that of the random walk model, the model concerning futures prices performs

differently depending on the commodity, whether it is consumed daily, weekly, monthly,

or even yearly. The general futures forecast model is expressed as:

St = α + βFt|t-k + et,

where Ft|t-k is the price for period t with future markets in period t-k.

Vector Autoregressive Model. The VAR Model, which is a simple, yet flexible

model that deals with multivariate time series data, is just a natural extension of the AR

Model, which deals with univariate time series data. Being one of the most commonly

used model in forecasting commodity prices, VAR Model is often compared to ARIMA

Model alongside Error Correction Model (ECM) in terms of their effectiveness given

various situations. However, it was also found out that there are times when VAR Model

is preferred over ARIMA Model because there are more theoretical backgrounds on the

former model than the latter. This model was popularized by the American

econometrician and macroeconomist Christopher A. Sims (1980) on his journal article

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entitled Macroeconomics and Reality. In that article, Sims demonstrated that VAR model

is able to provide a flexible, better framework in analyzing economic time series data.

Assuming there are three different time series variables, denoted by xt,1, xt,2, and xt,3, the

VAR model of order 1 is expressed as:

xt,1 = α1 + ϕ11xt-1,1 + ϕ12xt-1,2 + ϕ13xt-1,3 + wt,1

xt,2 = α2 + ϕ21xt-1,1 + ϕ22xt-1,2 + ϕ23xt-1,3 + wt,2

xt,3 = α3 + ϕ31xt-1,1 + ϕ32xt-1,2 + ϕ33xt-1,3 + wt,3 ,

where α is constant, ϕ is the phi coefficient, and wt is the error term.

Conceptual Framework

Mentioned in the hypotheses of the study are the characteristic and trend of the

commodity prices, most especially price of corn. Furthermore, it has been mentioned the

superiority of farmgate prices over wholesale and retail prices, and the importance of

focusing more on ARIMA model than the other models. Figure 1 represents specifically

the model which this study used in forecasting the price of corn in the Philippines.
 Autore
Autore
gressiv
gressiv
ee
Model
Model

Fut
ure
Pric
es
Historic
al
Prices

Autore
Autoregr
gr
essive
essive

CHAPTER IV

METHODOLOGY
Integrat
Integrat
ed
ed
Moving
Moving
Averag
Averag
ee
Model
Model
De La Salle University – Dasmariñas

Figure 1. Overall framework of the research

24
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De La Salle University – Dasmariñas

Research Design

This study dealt with the quantitative aspect of research. Specifically, this paper

aimed to assess whether what model performs the best in forecasting the price of corn in

the Philippines. The models included ARIMA model and AR model. This study used the

historical design of research. The historical design of research enabled the researches to

gather and synthesize past data in order to accept or reject a hypothesis – to prove

whether corn prices in the Philippines have an upward or downward trend.

Furthermore, this study is also an evaluative research. This paper also provided an

evaluation and assessment on what model performs the best in forecasting the price of

corn in the Philippines. Since food security is a very serious matter not only in the

Philippines, but in the other countries as well, the forecasting method should be ensured

that it provides the best, most accurate forecasts as possible.

Sources of Data

This study gathered data from the secondary sources that are available and

accessible to the public online. These data came from government agencies, specifically

the Philippine Statistics Authority (PSA), whose scope includes the gathering price of the

agricultural crops in the Philippines. Aside from PSA, the data also utilized the study

conducted by Power and Intal, Jr. (1990), under the World Bank Comparative Studies,

entitled Trade, Exchange Rate, and Agricultural Pricing Policies in the Philippines.

Methods of Data Analysis

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De La Salle University – Dasmariñas

This study used some statistical techniques depending on the requirements

presented on the objectives of the study. This section mentioned the different statistical

techniques that this study will employ. In the case of historical design, tables and graphs

are used in order to clearly see the trend of prices of corn in the Philippines. Using these

tools enabled the researcher to analyze the patterns displayed in the historical data

gathered, which will led to an intelligent conclusion as to why such pattern/s occurred.

As to the evaluative design of this study, both the ARIMA and AR models are

utilized for comparison as to what model performs best in forecasting the price of corn in

the Philippines. These two models are suitable to use when a particular study concerning

forecasting has only one variable available. In order to determine the significance of the

overall models of the study, both the coefficient of determination (R2) and the F-statistic

are checked as well. Eviews is used in the estimation procedure.

The ARIMA model, which satisfied the second objective of the study is:

Predicted Value of FPRICE = µ + FPRICEt-1 ,

where:

FPRICE = Farmgate Price of Corn in the Philippines (in PhP/kg.)

t = Time

µ = Constant term, average change over time

The AR model, on the other hand, which satisfied the third objective of the study

is:

Predicted Value of FPRICE = ϕFPRICEt−1 + ut ,

where:
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De La Salle University – Dasmariñas

c = Constant

ϕ = Phi coefficient (should not be less than 1)

u = Random error at period t

There are various ways of measuring the effectiveness of forecast performances of

different models such as mean absolute relative pricing error (MARPE), mean absolute

error (MAE), or root mean squared error (RMSE). This research primarily focused on

using RMSE and Theil’s Inequality Coefficient in checking the average forecast error of

both AR and ARIMA. RMSE is also a suitable measure to use given that it can only be

used for a specific commodity and not for comparison across various commodities. The

formula for RMSE is written as:

√
n
1
RMSE =
n
∑ ( Si - FCi )2 ,
i =1

where Si is the spot price of the commodity, and FCi is the commodity forecast price. And

the general formula of Theil’s Inequality Coefficient is expressed as:

√
n
1
n
∑ e2
i =1
TH = ,

√ √
n n
1
n
∑ y 2 + 1n ∑ ŷ2
i =1 i =1

where n is the sample size of the study, ŷ is the predicted value of y, and e is the

equivalence factor, denoting economies of scale.

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De La Salle University – Dasmariñas

CHAPTER V

RESULTS AND DISCUSSION

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De La Salle University – Dasmariñas

The first part of this section provided the prices of corn in the Philippines

(farmgate, retail, and wholesale) annually from years 1960 to 2016, which were obtained

primarily on the Philippine Statistics Authority. It is followed by the results of ARIMA

and AR models pertaining to their respective forecast performances in the farmgate prices

of corn in the Philippines, as well as the detailed discussions of those results. This chapter

ended with a decision criteria on which model performed better in terms of forecasting

the farmgate prices of corn in the Philippines.

Timmer (2008) conducted a study concerning the causes of high food prices. It is

because of these high food prices that poor consumers are experiencing grave

consequences concerning food security. The study concluded some factors that affect the

food prices depending on the year. In 2004, at least three main factors are found to be

dominant, namely: (1) China’s rapid economic growth and the excess of demand over

supply in India; (2) a constant decline in the value of US dollar; and (3) the combined

high and still rising prices of fuel that were found out to be related to the other

commodity prices.

In the Philippines, one of the most common agricultural problems is the climate or

weather. During typhoons, the usual scenario is that people expect a price spike in the

agricultural prices due to the damage dealt to the farmlands and its farmers. Contrary to

this belief, the Bureau of Agricultural Statistics (BAS) (2013) stated that prices of rice

and corn remained stable in Visayas region during the week when typhoon Yolanda, one

of the strongest typhoons recorded in the world, devastated the said region.
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De La Salle University – Dasmariñas

This is a scenario which is not commonly seen among different countries, and

therefore should not be expected to frequently occur. Padin (2016) reported that the

average farmgate prices of local corn have risen during the recent weeks as El Niño

continues to pester the areas in the Philippines where corn is thriving. Here, the farmers

had a difficult time earning due to the harsh climate, which forced the prices of corn to

increase.

The Status of Prices of Corn in the Philippines

Farmgate Prices. Table 1 shows the farmgate prices of corn in the Philippines

from 1960 to 2016 while Figure 2 is the presentation of these tabulated prices in a

graphical form. Generally, from the graph, the trend is found to be upward, with some

evident price fluctuations starting 1984 up to 2016.

Table 1
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De La Salle University – Dasmariñas

Farmgate Prices of Corn, Philippines, 1960-2016

Percentage
Year Price change
(in PhP/kg.) (%)
1960 0.17
1961 0.19 11.765
1962 0.18 -5.263
1963 0.23 27.778
1964 0.25 8.696
1965 0.26 4.000
1966 0.28 7.692
1967 0.26 -7.143
1968 0.26 0.000
1969 0.27 3.846
1970 0.33 22.222
1971 0.48 45.455
1972 0.54 12.500
1973 0.56 3.704
1974 0.91 62.500
1975 0.93 2.198
1976 0.94 1.075
1977 0.99 5.319
1978 0.97 -2.020
1979 1.00 3.093
1980 1.16 16.000
1981 1.29 11.207
1982 1.34 3.876
1983 1.39 3.731
1984 2.36 69.784
1985 2.91 23.305
1986 2.70 -7.216
1987 2.98 10.370
1988 2.96 -0.671
Continued
…
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De La Salle University – Dasmariñas

Percentage
Year Price change
(in PhP/kg.) (%)

1989 4.15 40.203

1990 4.26 2.651
1991 3.68 -13.615
1992 4.99 35.598
1993 4.62 -7.415
1994 4.98 7.792
1995 6.28 26.104
1996 6.16 -1.911
1997 5.97 -3.084
1998 5.60 -6.198
1999 5.39 -3.750
2000 6.37 18.182
2001 6.50 2.041
2002 6.42 -1.231
2003 6.67 3.894
2004 8.49 27.286
2005 7.54 -11.190
2006 9.11 20.822
2007 10.09 10.757
2008 10.79 6.938
2009 10.44 -3.244
2010 11.26 7.854
2011 11.95 6.128
2012 12.43 4.017
2013 11.62 -6.516
2014 12.73 9.552
2015 12.01 -5.656
2016 11.79 -1.832
 33

De La Salle University – Dasmariñas

Figure 2. Farmgate prices of corn in the Philippines

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De La Salle University – Dasmariñas

Retail Prices. Table 2 shows the retail prices of corn in the Philippines from 1960

to 2016 while Figure 3 is the presentation of these prices graphically. As shown in the

graph, the prices display an upward trend, with strong price spikes from around 1983

until 2016.
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De La Salle University – Dasmariñas

Table 2

Retail Prices of Corn, Philippines, 1960-2016

Percentage
Year Price change
(in PhP/kg.) (%)
1960 0.29
1961 0.30 3.448
1962 0.30 0.000
1963 0.37 23.333
1964 0.40 8.108
1965 0.45 12.500
1966 0.50 11.111
1967 0.46 -8.000
1968 0.46 0.000
1969 0.46 0.000
1970 0.50 8.696
1971 0.81 62.000
1972 0.82 1.235
1973 0.91 10.976
1974 1.39 52.747
1975 1.53 10.072
1976 1.46 -4.575
1977 1.60 9.589
1978 1.60 0.000
1979 1.67 4.375
1980 1.90 13.772
1981 2.20 15.789
1982 2.24 1.818
1983 2.34 4.464
1984 3.71 58.547
1985 5.11 37.736
1986 4.95 -3.131
1987 5.12 3.434
 36

De La Salle University – Dasmariñas

1988 5.19 1.367

Continued
…

Percentage
Year Price change
(in PhP/kg.) (%)
1989 5.93 14.258
1990 7.05 18.887
1991 6.80 -3.546
1992 8.10 19.118
1993 8.07 -0.370
1994 8.53 5.700
1995 9.79 14.771
1996 10.97 12.053
1997 11.10 1.185
1998 11.66 5.045
1999 11.73 0.600
2000 12.71 8.355
2001 13.41 5.507
2002 13.45 0.298
2003 12.98 -3.494
2004 14.40 10.940
2005 14.30 -0.694
2006 14.65 2.448
2007 15.79 7.782
2008 18.18 15.136
2009 19.90 9.461
2010 19.26 -3.216
2011 19.80 2.804
2012 21.51 8.636
2013 22.04 2.464
2014 20.76 -5.808
2015 20.70 -0.289
2016 20.36 -1.643
 37

De La Salle University – Dasmariñas

 38

De La Salle University – Dasmariñas

Figure 3. Retail prices of corn in the Philippines

 39

De La Salle University – Dasmariñas

Wholesale Prices. Table 3 shows the wholesale prices of corn in the Philippines

from 1960 to 2016 while Figure 5 presents the graphical form of these prices. It can be

seen from the graph that there is an upward trend in the prices, with rapid increase from

around 1983 up to 2016.

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De La Salle University – Dasmariñas

Table 3

Wholesale Prices of Corn, Philippines, 1960-2016

Percentage
Year Price change
(in PhP/kg.) (%)
1960 0.22
1961 0.25 13.636
1962 0.20 -20.000
1963 0.27 35.000
1964 0.28 3.704
1965 0.36 28.571
1966 0.36 0.000
1967 0.33 -8.333
1968 0.33 0.000
1969 0.33 0.000
1970 0.38 15.152
1971 0.64 68.421
1972 0.63 -1.563
1973 0.67 6.349
1974 1.07 59.701
1975 1.16 8.411
1976 1.19 2.586
1977 1.22 2.521
1978 1.23 0.820
1979 1.26 2.439
1980 1.41 11.905
1981 1.59 12.766
1982 1.59 0.000
1983 1.78 11.950
1984 2.92 64.045
1985 3.57 22.260
1986 3.48 -2.521
1987 3.63 4.310
 41

De La Salle University – Dasmariñas

1988 3.67 1.102

Continued
…

Percentage
Year Price change
(in PhP/kg.) (%)
1989 4.47 21.798
1990 4.80 7.383
1991 4.40 -8.333
1992 6.00 36.364
1993 5.60 -6.667
1994 6.20 10.714
1995 7.40 19.355
1996 7.71 4.189
1997 7.63 -1.038
1998 8.32 9.043
1999 8.47 1.803
2000 9.20 8.619
2001 9.43 2.500
2002 8.91 -5.514
2003 8.56 -3.928
2004 10.14 18.458
2005 9.48 -6.509
2006 10.85 14.451
2007 11.44 5.438
2008 13.14 14.860
2009 13.84 5.327
2010 14.41 4.118
2011 15.13 4.997
2012 15.78 4.296
2013 15.93 0.951
2014 14.31 -10.169
2015 15.52 8.456
2016 15.63 0.709
 42

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 43

De La Salle University – Dasmariñas

Figure 4. Wholesale prices of corn in the Philippines

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De La Salle University – Dasmariñas

Performance of the Forecasting Models

This part of the chapter presents the models, ARIMA and AR, used in forecasting

the farmgate prices of corn in the Philippines. In the case of ARIMA Model, there is no

need to check whether the variable is stationary or not because the Automatic ARIMA

Forecasting option in Eviews. This option is capable of detecting right away whether or

not the model is stationary or not. If it turns out to be stationary, then the software will

directly proceed to forecasting. On the contrary, if it is found out to be non-stationary,

then the software will differentiate the variable as many times as possible just to make

sure that the variable becomes stationary. For the AR Model, given that this study has

only one dependent variable, FPRICE, it’ll be much easier to determine whether the

independent variables are significant enough to explain the changes in FPRICE. This will

be done through estimating an AR Model using FPRICE, then estimating an Ordinary

Least Squares (OLS) Model using the estimated AR Model in order to check the

significance of the independent variables to changes in FPRICE. If the independent

variables are found to be significant, then the AR Model can proceed directly to

forecasting, without the need of differencing.

Autoregressive Integrated Moving Average Model. The ARIMA Model in this

study covers Tables 4 to 6, and Figures 5 to 7. Here the readers are presented with tables

and graphs to inform the readers regarding the significance, and the forecast performance

of the said model.

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Table 4

Equation Output

Dependent Variable: D(FPRICE,2)

Method: ARMA Maximum Likelihood (BFGS)
Date: 12/07/17 Time: 14:47
Sample: 1962 1996
Included observations: 35
Convergence achieved after 40 iterations
Coefficient covariance computed using outer product of gradients

Variable Coefficient Std. Error t-Statistic Prob.

C 0.013853 0.003329 4.161666 0.0003

AR(1) -1.149650 0.119157 -9.648197 0.0000
AR(2) -0.674533 0.125630 -5.369211 0.0000
MA(1) -0.057885 252.4355 -0.000229 0.9998
MA(2) -0.942108 5035.699 -0.000187 0.9999
SIGMASQ 0.069103 6.960627 0.009928 0.9921

R-squared 0.840283 Mean dependent var -0.004000

Adjusted R-squared 0.812745 S.D. dependent var 0.667371
S.E. of regression 0.288791 Akaike info criterion 0.708812
Sum squared resid 2.418608 Schwarz criterion 0.975444
Log likelihood -6.404218 Hannan-Quinn criter. 0.800853
F-statistic 30.51412 Durbin-Watson stat 2.025409
Prob(F-statistic) 0.000000

Inverted AR Roots -.57+.59i -.57-.59i

Inverted MA Roots 1.00 -.94

This equation output shows the overall performance of the model. The independent

variables AR(1) and AR(2) have p-statistics values of less than 5%, which make them

significant, while the independent variables MA(1) and MA(2) are insignificant to

explain the changes in the dependent variable D(FPRICE,2). Overall, the model is

good given the R-squared and F-statistic values. Also, the model is not spurious
 46

De La Salle University – Dasmariñas

because the R-squared is less than the Durbin-Watson statistic.

Table 5

Summary of the ARIMA Forecasting Model

Automatic ARIMA Forecasting

Selected dependent variable: D(FPRICE, 2)
Date: 11/30/17 Time: 18:35
Sample: 1960 1996
Included observations: 35
Forecast length: 20

Number of estimated ARMA models: 25

Number of non-converged estimations: 0
Selected ARMA model: (2,2)(0,0)
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De La Salle University – Dasmariñas

AIC value: 0.670498281469

The summary shows that out of the 25 estimated models of the software, the

ARMA model (2,2)(0,0) came out to be the best model. The forecast length of this model

is 20 years, from 1997 to 2016. The dependent variable has been differenced twice,

suggesting that it requires two differencing processes in order to make the variable

stationary. The main basis of the software for choosing the best model is the Akaike

information criterion (AIC), an estimator comparing the qualities of a certain model with

the other models. The lower the value of AIC, the better. In ARMA model (2,2)(0,0), the

AIC value proved to be at the minimum level.

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De La Salle University – Dasmariñas

Actual and Forecast

18

16

14

12

10

2
88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Forecast Actual

Figure 5. Forecast graph

It can be seen from the graph the comparison between the actual values of the

farmgate corn prices and forecasted values of the farmgate corn prices over the 20-year

period. While both of the values exhibit upward trends, it is evident that more

fluctuations can be seen in the actual values, while there exists a steady increase, with
 49

De La Salle University – Dasmariñas

minimal fluctuations in the forecasted values. The upward trend of the forecasted values

assumes that in the long-run, farmgate prices of corn will continue to rise steadily, with

almost no fluctuations at all. Given that assumption, the producers of corn will most

likely earn profit in the future from the high prices, probably because of a good weather,

an advanced technology, positive expectations, and many more.

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De La Salle University – Dasmariñas

Forecast Comparison Graph

24

20

16

12

0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

ARMA(3,3)(0,0) ARMA(1,4)(0,0) ARMA(0,0)(0,0)

ARMA(1,0)(0,0) ARMA(1,3)(0,0) ARMA(0,1)(0,0)
ARMA(3,0)(0,0) ARMA(2,0)(0,0) ARMA(1,1)(0,0)
ARMA(1,2)(0,0) ARMA(0,3)(0,0) ARMA(3,1)(0,0)
ARMA(2,4)(0,0) ARMA(0,2)(0,0) ARMA(2,1)(0,0)
ARMA(4,1)(0,0) ARMA(4,0)(0,0) ARMA(4,4)(0,0)
ARMA(3,4)(0,0) ARMA(0,4)(0,0) ARMA(4,3)(0,0)
ARMA(3,2)(0,0) ARMA(2,3)(0,0) ARMA(4,2)(0,0)
ARMA(2,2)(0,0)

Figure 6. Forecast comparison graph

This is the graphical representation of the selection of the best model among the

estimated 25 models. Most of these models look identical graphically given minimal
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De La Salle University – Dasmariñas

price fluctuations, but AIC proved to be the most important factor in choosing the best

model.

Table 6

ARIMA Criteria Table

Model Selection Criteria Table

Dependent Variable: D(FPRICE, 2)
Date: 11/30/17 Time: 18:35
Sample: 1960 1996
Included observations: 35

Model LogL AIC* BIC HQ

(2,2)
(0,0) -6.404218 0.670498 0.931728 0.762594
(4,2)
(0,0) -4.482015 0.674704 1.023010 0.797498
(2,3)
(0,0) -6.383138 0.723413 1.028181 0.830858
(3,2)
(0,0) -6.404214 0.724552 1.029320 0.831997
(4,3)
(0,0) -4.417846 0.725289 1.117134 0.863433
(0,4)
(0,0) -7.600198 0.735146 0.996376 0.827242
(3,4)
(0,0) -4.690908 0.740049 1.131894 0.878193
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De La Salle University – Dasmariñas

(4,4)
(0,0) -4.416331 0.779261 1.214644 0.932754
(4,0)
(0,0) -8.517299 0.784719 1.045949 0.876815
(4,1)
(0,0) -8.017047 0.811732 1.116501 0.919177
(2,1)
(0,0) -10.785248 0.853257 1.070948 0.930003
(0,2)
(0,0) -12.404468 0.886728 1.060881 0.948125
(2,4)
(0,0) -8.538437 0.893970 1.242276 1.016764
(3,1)
(0,0) -10.564258 0.895365 1.156595 0.987461
(0,3)
(0,0) -12.397380 0.940399 1.158091 1.017145
(1,2)
(0,0) -12.400924 0.940590 1.158282 1.017337
(1,1)
(0,0) -15.569217 1.057796 1.231949 1.119193
(2,0)
(0,0) -16.152033 1.089299 1.263452 1.150696
(3,0)
(0,0) -16.031148 1.136819 1.354510 1.213565
(0,1)
(0,0) -18.795438 1.178132 1.308747 1.224180
(1,3)
(0,0) -18.600630 1.329764 1.590994 1.421860
(1,0)
(0,0) -28.424926 1.698645 1.829260 1.744693
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De La Salle University – Dasmariñas

(0,0)
(0,0) -35.001225 2.000066 2.087143 2.030765
(1,4)
(0,0) -34.230442 2.228673 2.533441 2.336118
(3,3)
(0,0) -35.043330 2.326667 2.674973 2.449461
 54

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Akaike Information Criteria (top 20 models)

1.2

1.1

1.0

0.9

0.8

0.7

0.6
(2,2)(0,0)

(3,2)(0,0)

(3,4)(0,0)

(2,1)(0,0)

(2,4)(0,0)
(3,1)(0,0)

(1,1)(0,0)
(2,0)(0,0)
(4,2)(0,0)
(2,3)(0,0)

(4,3)(0,0)
(0,4)(0,0)

(4,4)(0,0)
(4,0)(0,0)
(4,1)(0,0)

(0,2)(0,0)

(0,3)(0,0)
(1,2)(0,0)

(3,0)(0,0)
(0,1)(0,0)
Figure 7. ARIMA Criteria Graph

Autoregressive Model. Tables 7 to 9, and Figure 8 fall under the AR Model. This

portion presents with some evidences via tables and graph that show the forecast

performance of the AR Model.

Table 7
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De La Salle University – Dasmariñas

Summary of the AR Model

Vector Autoregression Estimates

Date: 11/30/17 Time: 11:55
Sample (adjusted): 1962 2016
Included observations: 55 after
Adjustments
Standard errors in ( ) & t-statistics
in [ ]

FPRICE

FPRICE(-1) 0.698025
(0.13270)
[ 5.26031]

FPRICE(-2) 0.323340
(0.13613)
[ 2.37523]

C 0.187513
(0.11130)
[ 1.68468]

R-squared 0.982361
Adj. R-squared 0.981683
Sum sq. resids 16.09511
S.E. equation 0.556346
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F-statistic 1448.032
Log likelihood -44.24913
Akaike AIC 1.718150
Schwarz SC 1.827641
Mean dependent 4.564000
S.D. dependent 4.110710

With 2 lags set as the optimum number of lags, an AR equation has been

estimated using FPRICE. There are 2 independent variables, 1 independent

variable, with 3 coefficients in this model. So far, judging from the R-squared and

F-statistic, the model’s overall performance is good.

Table 8

Ordinary Least Squares

System: UNTITLED
Estimation Method: Least Squares
Date: 12/07/17 Time: 11:17
Sample: 1962 2016
Included observations: 55
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Total system (balanced) observations 55

Coefficient Std. Error t-Statistic Prob.

C(1) 0.698025 0.132696 5.260315 0.0000

C(2) 0.323340 0.136130 2.375234 0.0213
C(3) 0.187513 0.111305 1.684677 0.0980

Determinant residual covariance0.292638

Equation: FPRICE = C(1)*FPRICE(-1) + C(2)*FPRICE(-2) + C(3)

Observations: 55

R-squared 0.982361 Mean dependent var 4.564000

Adjusted R-
squared 0.981683 S.D. dependent var 4.110710
S.E. of regression 0.556346 Sum squared resid 16.09511
Durbin-Watson stat 2.046628

Table 8 showed the OLS estimation of FPRICE after its AR estimation, as

shown by the 2 lags set. Even if Table 7 has shown that the overall performance is

good, it will still not be enough is the independent variables are insignificant. To check

whether the independent variables are significant or not, we need to determine the p-

statistics first. If the value of p-statistics is less than 5%, then the variable is significant,

otherwise it is insignificant. The table above shows that the value of p-statistics of the

independent variables, FPRICE(-1) and FPRICE(-2), are 0.00% and 2.13%,

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respectively. Therefore, both FPRICE(-1) and FPRICE(-2) are significant enough,

individually, to explain the changes in FPRICE.

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De La Salle University – Dasmariñas

14

12

10

0
60 65 70 75 80 85 90 95 00 05 10 15

FPRICE FPRICE (VARSCEN)

Figure 8. Forecast graph

FPRICE is the farmgate prices, and is the actual values, while FPRICE

(VARSCEN) is the forecasted value using the AR Model. It suggests that the price of

corn will continue to rise in the future, followed by some fluctuations. With proper
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decision-making and with proper timing, the farmers will still be able to enjoy themselves

in the future.

Effectiveness of the Forecasting Models

This is the last part of this section where the researcher conducts an evaluation as

to what model is better in forecasting the price of corn in the Philippines. As mentioned

in Chapter IV, the basis of this study in determining the best model is the RMSE and

Theil’s Inequality Coefficient. Table 9, and Figures 9 and 10 both fall under this category.
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20

16

12

0
60 65 70 75 80 85 90 95 00 05 10 15

FPRICE
FPRICE_ARIMA
FPRICE (VARSCEN)

Figure 9. Forecast graph

Figure 9 presents the graphical comparison summary of the performance models

of ARIMA and AR models. Even though it seems that the AR Model is quite closer to the

actual price than the ARIMA Model, it is not enough to conclude that the former model is

better than the latter overall.

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Table 9

Evaluation of the Forecasting Models

Forecast Evaluation
Date: 12/01/17 Time: 11:44
Sample: 1960 2016
Included observations: 57
Evaluation sample: 1960 2016
Training sample: 1997 2016
Number of forecasts: 7

Combination tests
Null hypothesis: Forecast i includes all information contained in

others

Forecast F-stat F-prob

FPRICE_ARIMA 170.2885 0.0000

FPRICE_VAR 1.150590 0.2881

Evaluation statistics

Forecast RMSE MAE MAPE Theil

FPRICE_ARIMA 1.697087 0.923498 10.33805 0.125223

FPRICE_VAR 0.680486 0.348393 4.509829 0.056632
Simple mean 0.949273 0.499466 6.259343 0.074331
Simple median 0.949273 0.499466 6.259343 0.074331
Least-squares 0.708649 0.372900 4.678298 0.059326
Mean square error 1.475662 0.806033 9.208170 0.110671
MSE ranks 0.764124 0.371899 5.014489 0.061053

*Trimmed mean could not be calculated due to insufficient data

The table above shows the evaluation of the 2 forecasting models used in this

study. When using the Root Mean Squared Error, the lower the value, the better the

performance of the model. In the case of Theil’s Inequality Coefficient, if the value is 1,
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the forecasting model is called perfectly fit, which means that the actual and forecasted

values are the same. If the value is 0, then the predictive power of the forecasting model

is at its worst. Given that those 2 values are almost never seen in real life situation, there

exist values in between 0 and 1. The closer the value is to 0, the better the performance of

the forecasting model. In the table above, the shaded are is noticeable, stating that the AR

Model has lesser RMSE value compared to the ARIMA Model, and has a Theil’s

Inequality Coefficient Value of closer to 0. Therefore, in this study, the best model to use

in forecasting the farmgate prices of corn in the Philippines is the AR Model.

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Forecast Comparison Graph

18

17

16

15

14

13

12

11

10

9
06 07 08 09 10 11 12 13 14 15 16

FPRICE FPRICE_ARIMA
FPRICE (VARSCEN) Simple mean
Simple median Least-squares
Mean square error MSE ranks
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Figure 10. Forecast comparison graph

CHAPTER VI

SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

Summary

The research was primarily concerned in determining the model that would best

forecast the farmgate prices of corn, for 20 years, in the Philippines. Given the wide

range of forecasting models available, the researcher decided to compare the

performances of ARIMA and AR models in this univariate analysis. The main motivation

for this study is the fact that the corn is second most important crop in the Philippines and

almost no studies were made regarding forecasting the price of the said commodity.

Without the imported goods from abroad, the Filipinos would turn to the appetizers such

as Filipino bread, corn, and mashed potatoes. Of course, the decrease in demand for corns

will strongly affect the producers. Thus, this study was made to somehow help the

producers in their future decisions. Both historical and evaluative methods were used in

this study, which covered the years 1960 to 2015.

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Tables 1 to 3 showed the trend of the prices of corn in the Philippines (farmgate,

retail, and wholesale) from years 1960 to 2015. It was found out that regardless of the

varying price fluctuations, all these 3 kinds of prices exhibit a continuous upward trend,

which led to an assumption that in the long-run, prices of corn will further increase given

various factors.

Before estimating the equations, it is necessary first to check whether the overall

model performs good, and whether the variables are significant or not. There was no

problem with estimating the ARIMA model because Eviews is capable of directly

proceeding with forecasting whether or not the variable is stationary or not. If the

variable is non-stationary, the software automatically differences it – it can be once or

twice depending on the situation. All in all, the ARIMA model forecasting went smoothly

because the variables and the overall model were thoroughly checked. The ease, however,

of estimating an ARIMA model is not the same with estimating a AR model. First, an AR

model was estimated, and looking at the R-squared and F-statistic, the overall model is

good. Next, an OLS regression is estimated to find out whether the independent variables,

FPRICE(-1) and FPRICE(-2) are significant enough individually to explain the changes

in the dependent variable, FPRICE, and it turned out that the p-statistics of the 2

independent variables are both less than 5%, which means that the independent variables

are significant enough. From there, a forecasting model based on AR can be estimated.

Conclusions
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The univariate study was conducted in order to compare the performances of

ARIMA and VAR models, and determine whether which of these models performs better

in forecasting the farmgate prices of corn in the Philippines. The results show that given

the values of R-squared and F-statistic, both models are good overall, and that both

models have significant variables with the exception of ARIMA model, which has 2

significant independent variables out of all the 4 independent variables. This is to be

expected given that the researcher hypothesized that there is an upward trend in

commodity prices, including corn, due to inflation which is experienced by any country.

Both models are also non-spurious because their R-squared values exceed their Durbin-

Watson statistic values. The deciding factor of these two models is when their RMSE and

Theil’s Inequality Coefficient Values are checked. When looking into the RMSE, when

the value is lower, it means that the predictive capacity of a forecasting model is better.

On the other hand, Theil’s Inequality Coefficient might exhibit 3 kinds of values, namely:

(1) 0, where the forecast model’s predictive power is at its worst; (2) 1 (perfectly fit),

where the actual and forecasted values are the same; and (3) in between 0 and 1, wherein

the predictive power of the forecasting model becomes better as the value approaches

near 0. The results showed that the RMSE value of AR Model is lower than that of

ARIMA Model’s, and the former model’s Theil’s Inequality Coefficient value is closer to

0 than the latter model, which means that the AR model is the best model in forecasting

the farmgate prices of corn in the Philippines.

Recommendations
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The research was able to show clearly that the AR Model is better than the

ARIMA Model. However, some things have to be taken into consideration. First, there is

only one variable used in this study, and that is the price of corn itself. This means that

this study assumed that corn prices can be assumed, ceteris paribus. For the future

researchers, they are recommended to find other variables that might be useful in

forecasting corn prices. That will make this study much more realistic when other factors

will be included that will greatly make or break the performance of the forecasting

model.

For the Philippine government, it is recommended that they pay attention to the

importance of forecasting the corn prices in the Philippines. This will be very helpful in

ensuring the security of corn farmers in the future. The preservation of the farmers is the

preservation of the commodity itself. The majority of the Filipinos, especially the adults,

know the nutritional benefits of corn, as it even surpasses the health benefits of rice.

Given that the Philippine government have pointed out the importance of ensuring the

agricultural stability of a nation, it is recommended for them to put more emphasis on the

major crops in the Philippines, such as corn.

This study is only limited to the corn prices. The future researchers, and the

government as well are recommended to gather the data of corn prices to the neighboring

ASEAN countries for a more comprehensive study. That study will not only benefit the

Filipino people, but also those neighboring ASEAN countries.

This study forecasted the annual corn prices in the Philippines from 1960 to 2016.

The future researchers are recommended to improve this study by setting the time frame
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to quarterly, semi-annually, or even monthly. It will make this study more comprehensive,

and much closer to real-time events, as the researchers will be able to carefully analyze

what causes the price fluctuations given the present factors.

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