Research
Reports
Report 1999-01:
1997 Pricing Performance of Market Advisory Services for Corn and Soybeans
February 1999
Thomas E. Jackson,
Scott H. Irwin, and Darrel
L. Good[1]
Copyright
1999 by Thomas E. Jackson, Scott H. Irwin, and Darrel L. Good. All rights
reserved. Readers may make verbatim copies of this document for non-commercial
purposes by any means, provided that this copyright notice appears on
all such copies.
DISCLAIMER
The
advisory service marketing recommendations used in this research represent
the best efforts of the AgMAS Project staff to accurately and fairly interpret
the information made available by each advisory program. In cases where
a recommendation is vague or unclear, some judgment is exercised as to
whether or not to include that particular recommendation or how to implement
the recommendation. Given that some recommendations are subject to interpretation,
the possibility is acknowledged that the AgMAS track record of recommendations
for a given program may differ from that stated by the advisory service,
or from that recorded by another subscriber. In addition, the net advisory
prices presented in this report may differ substantially from those computed
by an advisory service or another subscriber due to differences in simulation
assumptions, particularly with respect to the geographic location of production,
cash and forward contract prices, expected and actual yields, carrying
charges and government programs.
Abstract
The purpose of this
research report is to present an evaluation of advisory service pricing
performance for the 1997 corn and soybean crops. Specifically, the average
price received by a subscriber to an advisory service is calculated for
corn and soybean crops harvested in 1997.It is important to recognize
that the performance results in this report address only the pricing,
or return, element of risk management.
The total number
of ,advisory programs0/00 evaluated is 23 for corn, and 21 for soybeans.The
term ,advisory program0/00 is used because several advisory services have
more than one distinct marketing program.A directory of the advisory services
included in the study can be found at the Agricultural Market
Advisory Service (AgMAS) Project website (http://www.aces.uiuc.edu/~agmas/).
In order to evaluate
the returns to the marketing advice produced by the services, the AgMAS
Project purchases a subscription to each of the services included in the
study. The information is received electronically via DTN.Staff members
of the AgMAS Project read the information provided by each advisory service
on a daily basis.
Certain explicit
assumptions are made to produce a consistent and comparable set of results
across the different advisory programs.These assumptions are intended
to accurately depict ,real-world0/00 marketing conditions.Several key
assumptions are: 1) with a few exceptions, the marketing window for the
1997 crops is September 1, 1996 - August 31, 1998, 2) cash prices and
yields refer to a Central Illinois producer, and 3) all storage is assumed
to occur off-farm at commercial sites.
The average net advisory
price across all 23 corn programs is $2.32 per bushel.The range of net
advisory prices for corn is substantial, with a minimum of $2.00 per bushel
and a maximum of $2.74 per bushel.The average net advisory price across
all 21 soybean programs is $6.40 per bushel.As with corn, the range of
net advisory prices for soybeans is substantial, with a minimum of $6.08
per bushel and a maximum of $6.99 per bushel.
Of the 23 marketing
programs for corn, 12 achieve a net price that is within (plus or minus)
10 cents of the market benchmark price of $2.33 per bushel.Four of the
advisory programs achieve a net price more than 10 cents higher than the
market benchmark price, while seven programs achieve a net price that
is more than 10 cents per bushel below the market benchmark price.For
soybeans, seven of the advisory programs are within (plus or minus) 10
cents per bushel of the market benchmark price of $6.30 per bushel.Eight
of the 21 programs achieve a net price that is more than 10 cents per
bushel above the harvest price, with six services more than 10 cents per
bushel below the harvest price.
Introduction to the
AgMAS Project
US agriculture has
entered a period of increased economic uncertainty.The 1996 Federal
Agricultural Improvement and Reform Act (FAIR) represents an especially
profound change in the operating environment of agriculture. For the first
time in over sixty years, the majority of producers have complete flexibility
in their crop production and marketing activities.Additional changes will
be caused by the full implementation of NAFTA and GATT and the fluctuating
world demand for agricultural products.
In this rapidly changing
environment, risk management plays a more important role in the overall
management of farm businesses.The use of private-sector advisory services
to secure marketing and price risk management advice is expected to increase
as producers respond to the rising demand for risk management strategies.Market
advisory services already are quite popular with many producers.Surveys
indicate that producers rank market advisory services highly in terms
of usefulness (e.g. Patrick and Ullerich).[2]
Despite their expected
importance in the future and current popularity, surprisingly little is
known about the risk management strategies recommended by these services
and their associated performance.There is a clear need to develop an ongoing
"track record' of the performance of these services.Information on
the performance of advisory services will assist producers in identifying
successful alternatives for marketing and price risk management.
The Agricultural
Market Advisory Service (AgMAS) Project, initiated
in the Fall of 1994, addresses the need for information on advisory services.The
project is jointly directed by Dr. Darrel L. Good and Dr. Scott H. Irwin
of the University of Illinois at Urbana-Champaign.Correspondence with
the AgMAS Project should be directed to:Tom Jackson, AgMAS Project Manager,
434A Mumford Hall, 1301 West Gregory Drive, University of Illinois at
Urbana-Champaign, Urbana, IL 61801;voice:(217)333-2792;fax:(217)333-5538;
email:tejackso@uiuc.edu.The AgMAS project also has a website that can
be found at the following address:http://www.aces.uiuc.edu/~agmas/.
Funding for the AgMAS
project is provided by the following organizations: American Farm Bureau
Foundation for Agriculture; Council for Food and Agricultural Research
(C-FAR); Cooperative State Research, Education, and Extension Service,
U.S. Department of Agriculture; Economic Research Service, U.S. Department
of Agriculture; Ohio Soybean Council; and the Risk Management Agency,
U.S. Department of Agriculture.
Purpose
of Report
The primary purpose
of this research report is to present an evaluation of advisory service
pricing performance for the 1997 corn and soybean crops.Specifically,
the average price received by a subscriber to an advisory service is calculated
for corn and soybean crops harvested in 1997.With a few exceptions, the
marketing window for the 1997 crops is September 1, 1996 - August 31,
1998.Another purpose of this report is to compare the pricing performance
results for the 1997 corn and soybean crops with previously released results
for the 1995 and 1996 crop years.
It is important to
recognize that the performance results in this report address the pricing,
or return, element of risk management.While certainly useful, these results
do not address the issue of risk.Two advisory services with the same net
price received may expose producers to quite different risks through the
marketing period.Research is currently underway at the AgMAS project to
quantify the risk profiles of the different services.A comparison of return
and risk will allow a more complete picture of the risk management performance
of agricultural market advisory services.
Another important
point to consider is that the pricing results are available for only three
marketing periods.It is inappropriate to draw too many conclusions
from three crop years' results.A useful analogy is university yield
trials for crop seed.In evaluating the results of crop yield trials, while
the results of the most recent year may be of particular interest, firm
conclusions about the relative merits of one type of seed versus another
can only be drawn after several years of results are available.The same
is true for market advisory services.
This report has been
reviewed by the AgMAS Review Panel, which provides independent, peer-review
of AgMAS Project research.The members of this panel are: Henry Bahn, National
Program Leader with the Cooperative State Research, Education, and Extension
Service, US Department of Agriculture; Frank Buerskens, independent agribusiness
consultant in Bloomington, Illinois; Renny Ehler, farmer in Champaign
County, Illinois; Chris Hurt, Professor in the Department of Agricultural
Economics at Purdue University; Terry Kastens, Assistant Professor in
the Department of Agricultural Economics at Kansas State University and
farmer in Rawlins County, Kansas; and Robert Wisner, University Professor
in the Department of Economics at Iowa State University.
The next section
of the report describes the procedures used to collect the data on market
advisory service recommendations.The following section describes the methods
and assumptions used to calculate the returns to marketing advice. The
third section of the report presents 1997 pricing results for corn and
soybeans.The final section presents a summary of the combined results
for the 1995, 1996, and 1997 crop years.
Data Collection
Most of the market
advisory services currently included in the study are those available
from Data Transmission Network (DTN), via their Ag Daily, DTNstant, and/or
DTN FarmDayta services.Two of the services are no longer available on
DTN, although they still deliver daily recommendations electronically.[3]
Not all of the available "premium" services offered by DTN are
included in the study.Only those services judged to contain specific marketing
advice for agricultural producers are included. A directory of the advisory
services included in the study can be found at the AgMAS website (http://www.aces.uiuc.edu/~agmas/).
In order to evaluate
the returns to the marketing advice provided by the services, the first
step is to collect the daily recommendations of the services.The AgMAS
Project purchases a subscription to each of the services included in this
study, and the information is received via DTN. Staff members of the AgMAS
Project read the information provided by each advisory service on a daily
basis.For the services that provide two daily updates, typically in the
morning and at noon, information is read in the morning and afternoon.In
this way, the actions of a producer-subscriber are simulated in ,real-time.0/00
The recommendations
of each advisory service are recorded separately.Some advisory services
offer two or more distinct marketing programs.This typically takes the
form of one set of advice for marketers who are willing to use futures
and options (although futures and options are not always used), and a
separate set of advice for producers who only wish to make cash sales.[4]
In this situation, both strategies are recorded and treated as distinct
strategies to be evaluated.[5]
When a recommendation
is made regarding the marketing of corn or soybeans, the recommendation
is recorded. In recording recommendations, specific attention is paid
to which year,s crop is being sold, (e.g., 1997 crop), the amount of the
commodity to be sold, which futures or options contract is to be used
(where applicable), and any price targets that are mentioned (e.g., sell
cash corn when March 1998 futures reach $2.50).When price targets are
given and not immediately filled, such as a stop order in the futures
market, the recommendation is noted until either the order is filled or
is canceled.
Several procedures
are used to check the recorded recommendations for accuracy and completeness.Whenever
possible, recorded recommendations are cross-checked against later status
reports provided by the relevant advisory service.Also, at the completion
of the marketing period, it is confirmed whether cash sales total exactly
100%, all futures positions are offset, and all options positions are
offset or expire worthless.
The final set of
recommendations attributed to each advisory program represents the best
efforts of the AgMAS Project staff to accurately and fairly interpret
the information made available by each advisory service.In cases where
a recommendation is considered vague or unclear, some judgment is exercised
as to whether or not to include that particular recommendation. This occurs
most often when a service suggests ,a producer might consider0/00 a position,
or when minimal guidance is given as to the quantity to be bought or sold.Given
that some recommendations are subject to interpretation, the possibility
is acknowledged that the AgMAS track record of recommendations for a given
program may differ slightly from that stated by the advisory service,
or from that recorded by another subscriber.
Selection
Criteria for Market Advisory Programs
The market advisory
services included in this evaluation do not comprise an exhaustive list
of all market advisory services available to producers.The initial services
included in the study were selected from the list of DTN Premium Services.The
first criterion used to identify services to be evaluated was that the
service had to provide marketing advice to producers, instead of advice
to speculative traders in agricultural commodities.Some of the services
that are included in this study do provide speculative trading advice,
but that advice must be clearly differentiated from marketing advice to
producers of a given commodity for the service to be included in this
study. The terms "speculative" trading of futures and options
versus the use of futures and options for "hedging" purposes
are used for identification purposes only.Any discussion of exactly what
types of futures and options trading activities constitute hedging, as
opposed to speculating, is beyond the scope of this project.
Another criterion
that is essential for a market advisory service to be included in this
study is that specific advice must be given for making cash sales of the
commodity in addition to any futures or options hedging activities. In
fact, some marketing programs which are evaluated in this study do not
make futures and options recommendations at all.However, marketing programs
that make futures and options hedging recommendations, but fail to clearly
state when cash sales should be made, or the amount to be sold, are not
included.
A third, and fairly
obvious, criterion, is that the advice must be transmitted to subscribers
before the action was to have been taken.This is largely the reason why
electronically-delivered services are evaluated.Recommendations that take
the form of "Today would have been a good day to sell" that
are received by a subscriber after the market has closed are clearly of
little value from a marketing standpoint.
Calculating
the Returns to Marketing Advice
At the end of the
marketing period, all of the (filled) recommendations are aligned in chronological
order.The advice for a given marketing year is considered to be complete
for each advisory program when cumulative cash sales of the commodity
reach 100%, all open futures positions covering the crop are offset, all
open option positions covering the crop are either offset or expired,
and the advisory program discontinues giving advice for that crop year,
such as re-ownership via futures or call options.The returns to each recommendation
are then calculated in order to arrive at a weighted average net price
that would be received by a producer who precisely follows the marketing
advice (as recorded by the AgMAS Project).
In order to produce
a consistent and comparable set of results across the different advisory
services, certain explicit assumptions are made.These assumptions are
intended to accurately depict ,real-world0/00 marketing conditions.
Marketing
Window
A two-year marketing
window, spanning September 1, 1996 through August 31, 1998, is used in
the analysis. The beginning date is selected because advisory services
in the sample first began to make marketing recommendations for the 1997
crop during September 1996.The ending date is selected to be consistent
with the ending date for corn and soybean marketing years as defined by
the US Department of Agriculture (USDA). There are a few exceptions to
the marketing window definition. Three advisory programs had relatively
small amounts (10% or less) of cash corn or soybeans unsold as of August
31, 1998.One marketing program also began pre-harvest hedges prior to
September 1, 1996. In these cases, the actual sales recommendations on
the indicated dates are recorded.
Prices
The cash price assigned
to each cash sale recommendation is the Central Illinois closing, or overnight,
bid.The Central Illinois price is the mid-point of the range of bids by
elevators in a 25-county area in central and east central Illinois.The
bids are collected and reported by the Illinois Department of Agriculture.
The Central Illinois
market also is used for forward contract transactions.Cash forward bids
reported by the Illinois Department of Agriculture are recorded only for
each Thursday.For the purposes of this study, we assume that the cash-forward
basis with respect to the Chicago Board of Trade (CBOT) December 1997
futures settlement price for corn, and the CBOT November 1997 futures
settlement price for soybeans remains the same until the next Thursday.Therefore,
the price assigned to forward contract recommendations for a particular
day prior to harvest is the CBOT December corn settlement price or November
soybean settlement price for that day minus the reported basis for that
day or the previous Thursday.It is assumed that all forward-contracted
grain is delivered at harvest.Although the marketing window for the 1997
corn and soybean crops begins in September 1996, the Illinois Department
of Agriculture did not begin to report actual cash forward bids until
February 13, 1997.In order to generate cash forward bids for the first
months of the marketing window, the cash forward basis on February 13,
1997 was assumed to be the basis from September 1996 through February
12, 1997.The cash forward bid was then calculated using the daily futures
prices as described above.
It should be noted
that the relative results of the analysis are likely to be similar if
another location is used.The calculated returns to all the trading programs
(as well as the benchmark prices) would most likely ,shift0/00 due to
basis differentials.However, the exact results may differ somewhat for
areas outside of Central Illinois.
The fill prices for
futures and options transactions generally are the prices reported by
the services.In cases where a service did not report a specific fill price,
the settlement price for the day is used.This methodology does not account
for liquidity costs in executing futures and options transactions.[6]
Quantity
Sold
Since most of the
advisory program recommendations are given in terms of the proportion
of total production (e.g., ,sell 5% of 1997 crop today0/00), some assumption
must be made about the amount of production to be marketed.For the purposes
of this study, if the per-acre yield is assumed to be 100 bushels, then
a recommendation to sell 5% of the corn crop translates into selling 5
bushels.When all of the advice for the marketing year has been carried
out, the final per-bushel selling price is the average price for each
transaction weighted by the amount marketed in each transaction.
The above procedure
implicitly assumes that the ,lumpiness0/00 of futures and/or options contracts
is not an issue.Lumpiness is caused by the fact that futures contracts
are for specific amounts, such as 5,000 bushels per CBOT corn futures
contract.For large-scale producers, it is unlikely that this assumption
adversely affects the accuracy of the results. This may not be the case
for small- to intermediate-scale producers who are less able to sell in
5,000 bushel increments.
Expected
Yield
When making hedging
or forward contracting decisions prior to harvest, the actual yield is
unknown.Hence, an assumption regarding the amount of expected production
per acre is necessary to accurately reflect the returns to marketing advice.Prior
to harvest, the best estimate of the current year,s expected yield is
a function of yield in previous years.In this study, the assumed yield
prior to harvest is the calculated trend yield, while the actual reported
yield is used from the harvest period forward.
In Central Illinois,
the expected 1997 yield for corn is calculated to be 141.5 bushels per
acre (bpa).Therefore, recommendations regarding the marketing quantity
made prior to October 1, 1997, are based on yields of 141.5 bpa. For example,
a recommendation to forward contract 20% of expected 1997 production translates
into a recommendation to contract 28.3 bpa (20% of 141.5).The actual reported
corn yield in Central Illinois in 1997 is 140 bpa.The same approach is
used for soybean evaluations.Since the calculated trend yield for Central
Illinois in 1996 is 46.5 bpa, and the actual yield in 1997 also is 46.5
bpa, no post-harvest yield adjustment is necessary.
The expected yield
is based upon a linear regression trend model of actual yields from 1972
through 1996 for Central Illinois.Previous research suggests a regression
trend model produces relatively accurate yield forecasts.[7]
It is assumed that,
after harvest begins, producers have a reasonable idea of what their actual
realized yield will be.Since harvest occurs at different dates each year,
estimates of harvest progress as reported by USDA in Central Illinois
are used.Harvest progress estimates typically are not made available soon
enough to identify precisely the beginning of harvest, so an estimate
is made based upon available data. Specifically, the date on which 50%
of the crop is harvested is defined as the "mid-point" of harvest.The
entire harvest period then is defined as a five-week window, beginning
two and one-half weeks before the harvest mid-point, and ending two and
one-half weeks after the harvest mid-point.In most years, a five-week
window will include about 80 percent of the harvest.
For 1997, the harvest
period for corn is defined as September 29, 1997, through October 31,
1997. For soybeans, the harvest period is September 17, 1997, through
October 21, 1997.Therefore, for recommendations made after September 29,
corn marketing recommendations are applied on the basis of the actual
yield of 140 bpa.The expected soybean yield would have been changed on
September 17 if the actual yield had been different from the calculated
trend yield.
The issue of changing
yield expectations typically is not dealt with in the recommendations
of the advisory programs.For the purpose of this study, the actual harvested
yield must exactly equal total cash sales of the crop at the end of the
marketing time frame. Hence, an adjustment in yield assumptions from expected
to actual levels must be applied to cash transactions at some point in
time.In this analysis, an adjustment is made in the amount of the first
cash sale made after the beginning of the harvest period.For example,
if a service advises forward contracting 50% of the corn crop prior to
October 1, this translates into sales of 70.75 bpa (50% of 141.5).However,
when the actual yield is applied to the analysis, sales-to-date of 70.75
bpa imply that 50.5% of the crop has already been contracted.In order
to compensate for this, the amount of the next cash sale is adjusted to
align the amount sold.In this example, if the next cash sale recommendation
is for a 10% increment of the 1997 crop, making the total recommended
sales 60% of the crop, the recommendation is adjusted to 9.5% of the actual
yield (13.25 bushels), so that the total crop sold to date is 60% of 140
bushels per acre (70.75+13.25=84=0.6*140). After this initial adjustment,
subsequent recommendations are taken as percentages of the 140 bpa actual
yield, so that sales of 100% of the crop equal sales of 140 bpa.
While the amount
of cash sales is adjusted to reflect the change in yield information,
a similar adjustment is not made for futures or options positions that
are already in place.For example, assume that a short futures hedge is
placed in the December 1997 contract for 25% of the 1997 crop prior to
harvest.Since the amount hedged is based on the trend yield assumption
of 141.5 bpa, the futures position is 35.375 bpa (25% of 114.5).After
the yield assumption is changed, this amount represents a short hedge
of 25.27% (35.375/140).The amount of the futures position is not adjusted
to move the position to 25% of the new yield figure.However, any futures
positions recommended after the beginning of harvest are implemented as
a percentage of the actual yield.
Brokerage
Costs
Brokerage costs are
incurred when producers open or lift positions in futures and options
markets. For the purposes of this study, it is assumed that brokerage
costs are $50 per contract for a round-turn for futures transactions,
and $30 per contract to enter or exit an options position.Further, it
is assumed that CBOT corn and soybean futures are used, and the contract
size for each commodity is 5,000 bushels.Therefore, per-bushel brokerage
costs are 1 cent per bushel for a round-turn futures transaction and 0.6
cents per bushel for each options transaction.
Carrying
Charges
An important element
in assessing returns to an advisory program is the economic cost associated
with storing grain instead of selling grain immediately at harvest. The
cost of storing grain after harvest (carrying costs) consists of two components:
physical storage charges and the opportunity cost incurred by foregoing
sales when the crop is harvested. Physical storage charges can apply to
off-farm (commercial) storage, on-farm storage, or some combination of
the two.Opportunity cost is the same regardless of the type of physical
storage.
For the purposes
of this study, it is assumed that all storage occurs off-farm at commercial
sites. This is assumed for several reasons.First, commercial storage costs
reflect the full economic costs of physical storage, whereas on-farm storage
cost estimates may not, due to differing accounting methods and/or time
horizons.Second, commercial storage costs are relatively consistent across
producers in a given area, whereas on-farm storage costs likely vary substantially
among producers. Third, commercial storage cost data are readily available,
whereas this is not the case for on-farm storage.
Carrying charges
are assigned beginning October 31 for corn and October 21 for soybeans,
which were the estimated ending points of the harvest windows.Physical
storage charges are assumed to be a flat 13 cents per bushel from the
end of harvest through December 31.After January 1, physical storage charges
are assumed to be 2 cents per month (per bushel), with this charge pro-rated
to the day when the cash sale is made. The storage costs represent the
typical storage charges quoted in a telephone survey of Central Illinois
elevators.
The interest rate
is assumed to be 9.2% per year, and is applied to the average harvest-time
price for each crop.This interest rate is the average rate for all commercial
agricultural loans for the fourth quarter of 1997 and the first three
quarters of 1998 as reported in the Agricultural Finance Databook
published by the Board of Governors of the Federal Reserve Board.The interest
charge for storing grain is the interest rate compounded daily from the
harvest mid-point to the date of sale.
In addition to the
storage and interest costs, another charge is assigned to corn (but not
soybeans) that goes into commercial storage.This charge, referred to as
a ,shrink charge0/00, is commonly deducted by commercial elevators on
,dry0/00 corn that is delivered to the elevator to be stored, and reflects
a charge for drying and volume reduction (shrinkage) which occurs in drying
the corn from (typically) 15% to 14% moisture.The charge for drying is
a flat 2 cents per bushel, while the charge for volume reduction is 1.3%
per bushel.Given that the harvest-time cash price in Central Illinois
for 1997 is $2.65 per bushel, the charge for volume reduction is 3.4 cents
per bushel ($2.65 * .013). Therefore, the flat shrink charge assigned
to all stored corn is 5.4 cents per bushel.
It should be noted
that the cost of drying corn down to 15% moisture and the cost of drying
soybeans to storable moisture are not included in the calculations.This
cost is incurred whether or not the grain is stored or sold at harvest,
or whether the grain is stored on-farm or off-farm.
Benchmark
Prices
In addition to comparing
the net price received across advisory programs, it is useful to compare
the results to simple market benchmark prices.These prices are intended
to provide information about the actual prices that were available for
a particular crop, and provide an indication of how producers might have
fared using some basic marketing strategies that do not require professional
marketing advice.
In the 1995 and 1996
AgMAS pricing performance reports, two market benchmark prices were reported:
the average harvest-period price in Central Illinois and the average price
received by Illinois farmers (as reported by USDA).However, recent research
conducted by the AgMAS project[8] indicates that these benchmarks have some weaknesses
that make them less than ideal indicators of the price that was offered
by the market for a given crop.
Conceptually, a useful benchmark should: 1) be simple to understand and
to calculate; 2) represent the returns to a marketing strategy that could
be implemented by producers; 3) be directly comparable to
the net advisory price received from following the recommendations of
a market advisory service; 4) not be a function of the actual recommendations
of the advisory services or of the actual marketing behavior of farmers,
but rather should be external to their marketing activities; and
5) be stable, so that it represents the range of prices made available
by the market throughout the marketing period instead of representing
the price during a small segment of the marketing period.
The harvest cash
price only includes prices during a small portion of the entire period
over which the crop could be marketed.In certain years this price may
not fairly represent the true range of prices available.The calculation
of the harvest cash price also can be sensitive to the specific time period
selected as the harvest period.The average price received by Illinois
farmers is not directly comparable to the net advisory price as calculated
in this study because the average price received includes price discounts
that were incurred because some grain marketed was of substandard quality,
while the AgMAS project assumes that all grain marketed meets the requirements
of No. 2 yellow corn or No. 1 soybeans.
The "market
benchmark price" that was selected as the most appropriate for this
evaluation is the average cash price for corn and soybeans over the entire
marketing period.The marketing period used in the AgMAS project for a
given crop spans two calendar years, beginning on the first of September
in the year prior to harvest, and extends through the end of August in
the year after harvest.As its name suggests, it is calculated as the average
of the daily Central Illinois cash grain bids available for the 1997 crop.For
the 1997 crop, the marketing period began on September 3, 1996, and ended
on August 31, 1998.Pre-harvest cash prices represent cash-forward bids
for Central Illinois for the 1997 crop, while daily spot prices for Central
Illinois are used for the post-harvest period.
The average cash
price meets all of the selection criteria, except it would not be easily
implementable by farmers since it involves marketing a small portion of
each crop every day of the two-year marketing window.It can be shown,
though, that the price realized via a more manageable strategy of ,spreading0/00
sales during the marketing window very closely approximates the average
cash price.Therefore, it is determined that the average cash price meets
all five selection criteria, and is the most appropriate market benchmark
to be used in evaluating the pricing performance of market advisory services.
Two adjustments are made to the daily cash prices to make the average cash
price benchmark consistent with the calculated net advisory prices for each marketing
program. First, instead of taking the simple average of the daily prices, a weighted
average price is calculated to account for changing yield expectations.This adjustment
is consistent with the procedure described previously in the "Expected Yield"
section. The daily weighting factors for pre-harvest prices are based on the calculated
trend yield, while the weighting of the post-harvest prices is based on the actual
reported yield for Central Illinois. The second adjustment to the daily cash prices
is to adjust the post-harvest cash prices to a harvest equivalent by subtracting
carrying charges.The daily carrying charges are calculated in the same manner
as those for the net advisory price.
While the market benchmark price described here is not the only benchmark which
could be used, careful analysis suggests that it is the most appropriate for any
discussion of how the advisory programs fared compared with "the market".An
example of an alternative market benchmark that has been used in some circumstances
to evaluate previous AgMAS pricing results is the average price received by U.S.
farmers as reported by USDA.While the average price received is useful in many
circumstances, it produces a biased comparison in this case because of differences
in the level of prices between Central Illinois and the U.S. as a whole.Also,
since the average price received is not adjusted to a harvest equivalent (i.e.,
carrying charges are not deducted from post-harvest prices) it has a significant
upward bias when compared with the net advisory prices as reported in this publication.
1997
Pricing Performance Results for the Advisory Services
Evaluation results
for the advisory programs for the 1997 corn and soybean crops are presented
in Tables 1 through 3 and Figures
1 through 4.For a specific example of how the marketing recommendations
are translated into a final net advisory price which incorporates the
aforementioned parameters, please refer to the 1996 AgMAS Pricing Report.[9]
The program-by-program
results of the evaluation of corn marketing programs are contained in
Table 1.This table shows the breakout of
the components of the net advisory price as well as the net advisory price
itself. The average net advisory price for all 23 programs is $2.32 per
bushel, one cent below the market benchmark price.The range of net advisory
prices for corn is fairly large, with a minimum of $2.00 per bushel and
a maximum of $2.74 per bushel
Table
2 lists the program-by-program results of the soybean evaluations.
The average net advisory price for all 21 programs is $6.40 per bushel,
10 cents per bushel above the market benchmark price. As with corn, the
range of net advisory prices for soybeans is substantial, with a minimum
of $6.08 per bushel and a maximum of $6.99 per bushel.
A point to consider
when examining Tables 1 and 2 is the impact
of the assumption that all storage occurs off-farm. It is possible to
argue that, in the short run, the marginal cost of on-farm storage of
grain is zero if the facilities already exist and variable costs associated
with handling grain and maintaining grain quality are not included.Applying
this logic, the results change somewhat. Excluding the costs of commercial
storage entirely (but continuing to subtract interest costs), the average
net advisory price for corn increases to $2.48 per bushel and the net
advisory price for soybeans increases to $6.50 per bushel.The calculation
of the market benchmark price also would be impacted by the change in
the storage cost assumption.If only interest costs are subtracted from
the daily cash prices, the market benchmark price for corn (soybeans)
becomes $2.44 ($6.42) per bushel.Therefore, if physical storage charges
are assumed to be zero, the net advisory price for corn is four cents
above the market benchmark price, and for soybeans the net advisory price
is eight cents above the market benchmark price.
Since many Corn Belt
producers grow both corn and soybeans, it also is useful to examine a
combination of the results for the corn and soybean marketing programs.In
order to do this, gross revenue is calculated for a Central Illinois producer
who follows both the corn and soybean marketing advice of a given service.It
is assumed that the producer has 1,000 acres total, planted half to corn
and half to soybeans, and achieved corn and soybean yields equal to the
actual yield for the area in 1997.These revenues are compared with the
revenue a Central Illinois producer could have received by achieving the
market benchmark price for both corn and soybeans.Total advisory revenue
is calculated only for those programs that offer both corn and soybean
marketing advice.
Table
3 lists the program-by-program results of the total revenue analysis.The
average revenue achieved by following both the corn and soybean advisory
programs for the hypothetical 1,000 acre farm is $311,500, which is $1,925
above the revenue that would have been received if the producer received
the market benchmark price in Central Illinois for the 1997 marketing
period.The spread in total revenue for a 1,000 acre farm also is noteworthy,
with the difference between the bottom- and top-performing advisory programs
exceeding $70,000.
For comparison purposes,
the annual subscription cost of each advisory programalso is listed in
Table 3.Subscription costs, which average
$291 per program, are small relative to total revenue, on average less
than one-tenth of one percent of total revenue for a 1,000 acre farm.Note
that subscription costs are not subtracted from any of the revenue figures
presented in Table 3.
The distribution
of the net advisory prices is illustrated in Figure
1. Of the 23 marketing programs for corn, 12 programs achieved a net
price that is within (plus or minus) 10 cents of the market benchmark
price of $2.33 per bushel.Three of the advisory programs achieve a net
price between $2.44 and $2.64 per bushel (11 to 31 cents higher than the
market benchmark price), and one service achieves a net price of more
than 32 cents above the market benchmark. Five programs are grouped in
a range between 11 and 31 cents below the market benchmark price, with
one program more than 32 cents below the market benchmark.
For soybeans, seven
of the advisory programs are within (plus or minus) 10 cents per bushel
of the market benchmark price of $6.40 per bushel, while six services
fall below this range.On the other hand, three of the 21 programs achieve
a net price that is between 11 and 31 cents per bushel above the market
benchmark price, with three additional services in the range between 32
and 52 cents per bushel above the market benchmark.Two programs achieve
a net price of more than 53 cents above the market benchmark price.
In terms of revenue,
10 of the 21 programs achieve total revenues within (plus or minus) $10,000
of the market benchmark revenue.Three programs achieve a total revenue
that is between $10,000 and 30,000 above the market benchmark revenue,
while two programs achieve a total revenue of more than $30,000 above
the market benchmark revenue. Six programs achieve a total revenue that
is between $10,000 and 30,000 below the market benchmark revenue.
Another view of the
pricing performance of the advisory programs is shown in Figures
2 through 4.Here, net advisory prices or revenues are ranked from
highest to lowest and plotted versus the market benchmark price. As shown
in Figure 2, 12 of the 23 corn marketing
programs achieve a net price for corn that is equal to or higher than
the market benchmark price. There is a high frequency of observations
right around the benchmark price. As reported in Figure
3, 13 of the 21 soybean programs achieve a net advisory price equal
to or higher than the market benchmark price. As with corn, a large number
of observations are close to the market benchmark. Figure
4 shows the comparison between the total advisory revenue and the
total revenue implied by the market benchmark price. Total advisory revenue
was greater than the market benchmark revenue for 12 of the marketing
programs.
Figure
6 shows the pattern of prices available for the 1997/98 corn and soybean
crops. Forward bids for the 1997 corn crop were relatively high during
the early harvest period of the 1996 crop, which is a remnant of the record-high
corn prices seen in the spring and summer of 1996.Cash-forward bids also
were in the $2.60 to 2.75 per bushel range prior to the 1997 planting
season. Corn prices then declined from planting until August 1997, when
concerns about dryness caused a rally into harvest, and then prices rallied
sharply during the early-harvest period, to a level between $2.60 and
2.80, that lasted from harvest through most of December 1997. After that,
prices started a nearly constant decline through the rest of the marketing
period. This decline was caused mostly by a decline in world demand resulting
from economic problems in many countries. Corn production outside the
U.S. was also rather large, which reduced the import needs of some countries
and increased exportable supplies in competing countries. Large U.S. acreage
planted to corn accelerated the downtrend, until the corn market fell
to below $2.00 by the end of the marketing period.
Soybean prices for
the 1997 crop followed a similar path to that of corn, and were influenced
by similar factors. Tight 1996 crop supplies helped to support soybean
prices of $6.50 to $7.20 from the pre-planting period through early summer.
Prices then dropped to below $6.00 at times during July and August due
to large soybean planted acreage and expectations of a large 1997 crop.
Concern about crop losses, plus very strong demand for soybean exports,
helped fuel a contra-seasonal rally during harvest which resulted in prices
near or above $7.00 per bushel through mid-December 1997.Prices then gradually
declined until the end of March 1998, when it became clear that soybean
acreage would be quite large again in 1998.Record soybean production in
Brazil and Argentina also pressured prices due to increased competition
in export markets. Soybean prices staged a final rapid decline during
July and August 1998 when it became clear that the 1998 crop would be
at least adequate.
Figure
6 offers a slightly different perspective on prices for the 1997/98
corn and soybean crops. Storage, interest, and (in the case of corn) shrink
charges are subtracted from the post-harvest cash prices to show the pattern
of harvest-equivalent prices available through the marketing year. While
Figure 6 illustrates that the corn and soybean
markets basically offered no returns to storage, this picture becomes
much more clear when the costs of storage are subtracted from corn and
soybean cash prices. By late August 1998 the harvest-equivalent corn price
was down to nearly $1.00 per bushel, while the harvest-equivalent soybean
price was below $4.50 per bushel.
The fact that cash
corn bids for the 1997 crop were the highest in the pre-harvest period
and into harvest, and declined rapidly after harvest, meant that a marketing
program which sold some or all of a producer's corn and soybeans prior
to harvest or at harvest achieved a relatively high price for the crop
when compared with programs which held the crop in storage. Also, programs
that utilized the traditional strategy of short futures hedges prior to
harvest tended to show gains in futures trading, although the pre-harvest
rally erased those gains in some cases. Marketing programs that recommended
producers assume more downward price risk through storing cash grain not
only obtained a lower cash price but also incurred storage and interest
costs.
Again, it is important
to recognize that the performance results are based on pricing, or return,
performance only. While certainly useful, these results do not address
the issue of risk. Two programs with the same net advisory price may expose
producers to quite different risks through the marketing period. Research
is currently underway at the AgMAS project to quantify the risk profiles
of the different programs. A comparison of return and risk will allow
a more complete picture of the performance of agricultural market advisory
services.
Three-year Average
Pricing Performance Results
A summary of the
results of the pricing performance evaluations for the 1995, 1996, and
1997 corn and soybean marketing years is contained in Tables
4 through 6 and Figures 7 through 10.Some
of the marketing programs included in the table were not evaluated for
all three years. The three-year averages are calculated only for the 19
marketing programs that were evaluated for all three years. The results
for the 1995 and 1996 crop years are those contained in the 1996 AgMAS
Pricing Report[10].
The only change in assumptions used to calculate the 1997 results is that
the exact dates of the harvest period are slightly different, which should
have very little impact on the results.
As shown in Table
4, the average net advisory corn price over the three years for the
19 programs is $2.65 per bushel, which is two cents above the three-year
market benchmark price of 2.63.The results range from a low of $2.36 to
a high of $3.03.
The three-year results
for soybeans are listed in Table 5.The three-year
average net advisory soybean price is $6.73 per bushel, which is 17 cents
above the three-year market benchmark price of $6.56. The results range
from a low of $6.37 to a high of $7.27.
The three-year results
for the total advisory revenue are presented in Table
6.The average total advisory revenue for the three years is $331,716.This
is $4,812 higher than the three-year market benchmark revenue. The results
range from a low of $312,468 to a high of $359,908.
The distributions
of the three-year average prices and revenues are illustrated in Figure
7.Only the 19 programs that were evaluated in all three years are
included in the graphs. For corn, 12 of the 19 programs achieve a three-year
average net advisory price within 10 cents of the three-year market benchmark
price of $2.63.Two of the 19 programs achieve a three-year average corn
price between 11 and 31 cents greater than the market benchmark price,
with one program more than 32 cents above the market benchmark. Four of
the programs have a three-year average between 11 cents and 32 cents below
the market benchmark price.
For soybeans, the
picture is somewhat different. Six of the 19 programs are within 10 cents
of the three-year market benchmark price of $6.56.However, 12 of the programs
achieve a three-year average soybean price that is 11 cents or more above
the market benchmark price. Eight of the programs are between 11 and 31
cents above the market benchmark price, with three programs between 32
and 52 cents above, and one program more than 53 cents above the market
benchmark price. Only one service is more than 11 cents below the three-year
market benchmark price.
In terms of total
advisory revenue, 11 of the 19 marketing programs are within $10,000 of
the three-year market benchmark revenue of (approximately) $327,000.Four
of the programs achieve a total between $10,000 and $30,000 above the
benchmark, with one more program more than $30,000 above the three-year
benchmark. Three of the programs are more than $10,000 below the benchmark.
As shown in Figure
8, 11 of the 19 corn marketing programs achieved a three-year average
net advisory price that was above the three-year average market benchmark
price of $2.63.For soybeans (Figure 9),
17 of the 19 programs achieved a three-year average price that was above
the three-year average market benchmark price of $6.56.
Figure
10 shows the comparison of the three-year average net advisory revenues
versus the three-year average revenue implied by the market benchmark
price. Twelve of the 19 advisory programs achieved a three-year average
revenue that was above the three-year average market benchmark revenue
of $326,904.
[2] Patrick, G.F. and S. Ullerich.,Information Sources
and Risk Attitudes of Large Scale Farmers, Farm Managers, and Agricultural
Bankers.0/00Agribusiness. 12(1996):461-471.
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