Forecasting the price of salmon
A major producer of consumer goods set out to forecast the price of fresh salmon three years ahead. Such a forecast was needed in deciding whether the firm should enter the business of supplying salmon. The firm's analysts estimated the quantity of fresh salmon that would be supplied in the market three years ahead. Because of substantial plans to expand the production of farmed Atlantic and Pacific salmon in Canada, Chile, Japan and Ireland, this projected amount was considerably greater than the actual quantity supplied at the time the forecast was made. In addition the firm's analysts estimated the quantity of fresh salmon that would be demanded three years ahead. Their results showed that, if the price of salmon remained unchanged over the next three years, the quantity supplied would exceed the quantity demanded by about 20 percent at the end of the three year period. The firm's analysts believed that the quantity supplied three years hence would be approximately equal to their estimates, regardless of whatever changes occurred in price during this three- year period. They also estimated the price elasticity of demand for fresh salmon to be about -2.0. Like the other estimates quoted above, it was regarded as rough but useful.
As a consultant hired by this firm how would you use these estimates to forecast the change in the salmon price over the next three years? What will be your rough forecast? How will you consider the structure of the fresh salmon industry to calculate the forecast? Will you advise the firm to enter the industry?