1999 Pricing Performance of Market Advisory Services for Corn and Soybeans
Joao Martines-Filho, Darrel
L. Good, and Scott H. Irwin
Copyright 2000 by Joao Martines-Filho, Darrel
L. Good, and Scott H. Irwin. 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.
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
The primary purpose of this research report is to present an evaluation
of advisory service pricing performance for the 1999 corn and soybean crops.
In order to evaluate the returns to the marketing advice produced by the services,
the AgMAS Project purchases a subscription to each of the programs offered by
a service. The information is received electronically via DTN, world wide website
or e-mail. Staff members of the AgMAS Project read the information provided by
each advisory program on a daily basis. A directory of the advisory programs
included in the study can be found at the Agricultural Market Advisory
Services (AgMAS) Project website (http://web.aces.uiuc.edu/farmdoc/agmas/).
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-world” marketing conditions. Several
key assumptions are: i) with a few exceptions, the marketing window for the 1999
crop year is from September 1, 1998 through August 31, 2000, ii) cash prices and
yields refer to a central Illinois producer, iii) all storage is assumed to occur
off-farm at commercial sites, and iv) marketing loan recommendations made by advisory
programs are followed wherever feasible.
The average net advisory price across all 26 corn programs in 1999
is $2.02 per bushel, three cents below the market benchmark price. The range
of net advisory prices for corn is substantial, with a minimum of $1.66 per bushel
and a maximum of $2.49 per bushel. The average net advisory price across all
25 soybean programs in 1999 is $5.67 per bushel, seventeen cents above the market
benchmark. As with corn, the range of net advisory prices for soybeans is substantial,
with a minimum of $4.68 per bushel and a maximum of $7.10 per bushel. The average
revenue achieved by following both the corn and soybean programs offered by an
advisory service is $299 per acre, $2.00 more than market benchmark revenue for
1999. The spread in advisory revenue also is noteworthy, with the difference
between the bottom- and top-performing advisory programs reaching more than $100
An advisory program’s net price or revenue received is an important
indicator of performance. However, it is the tradeoff between pricing performance
and risk that is likely to be of greatest interest to producers. Based on the
data available for 1995-1999 crop years, a positive tradeoff between average net
advisory price and risk is found for corn and revenue; producing higher net prices
generally requires that an advisory program take on more risk, and vice versa.
However, only one advisory program in corn outperforms the 24-month market benchmark
when both price and risk are considered. Four do so in soybeans, and none based
on revenue. These performance results are sensitive to the specification of the
market benchmark. In addition, it is important to emphasize that the pricing and
risk performance results are based on five observations. This is a relatively
small sample for estimating the true risks of market advisory programs. Hence,
the return-risk results should be viewed as an exploratory approach rather than
Introduction to the AgMAS Project
Grain producers operate in a highly uncertain economic environment.
The roller coaster movement of corn and soybean prices since 1995 is ample evidence
of the uncertainty and risk facing grain producers. In this rapidly changing
environment, marketing and risk management play an important role in the overall
management of farm businesses. The use of private-sector advisory services has
increased over time as producer demand for marketing and risk management advice
has increased. Surveys document the high value that many producers place on market
Despite their current popularity and expected importance in the future,
surprisingly little is known about the marketing and 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 Services
(AgMAS) Project, initiated in 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: Dr. Joao Martines-Filho, 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;
e-mail: firstname.lastname@example.org. The AgMAS Project also has a website that can be found
at the following address: http://web.aces.uiuc.edu/farmdoc/agmas/.
Funding for the AgMAS project is provided by the following organizations:
Illinois Council on Food and Agricultural Research; Cooperative State Research,
Education, and Extension Service, U.S. Department of Agriculture; Economic Research
Service, U.S. Department of Agriculture; the Risk Management Agency, U.S. Department
of Agriculture, and the Initiative for Future Agriculture and Food Systems, 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 1999 corn and soybean crops.
Specifically, the net price received by a subscriber to an advisory service is
calculated for corn and soybean crops harvested in 1999. With a few exceptions,
the marketing window for the 1999 crop year is from September 1, 1998 through
August 31, 2000. Another purpose of this report is to compare the pricing performance
results for the 1999 corn and soybean crops with previously released results for
the 1995, 1996, 1997 and 1998 crop years.
A relevant question is whether useful conclusions about pricing performance
can be made based on data from five crop years. From a purely statistical standpoint,
samples with five observations typically are considered small. This perspective
would suggest it is inappropriate to draw too many conclusions from the available
data on pricing performance. From a practical, decision-making standpoint, samples
with five observations often are considered adequate to reach conclusions. A
useful comparison in this context can be made to university yield trials for crop
varieties. As an example, the University of Illinois Variety Testing program (http://www.cropsci.uiuc.edu/vt/) presents
only two-year or three-year averages of the yields for crop varieties in the trials,
and in many cases these cannot be computed because of turnover in the varieties
tested from year-to-year. Despite the limitations, this type of yield trial data
is widely used by farmers in making varietal selections. On balance, then, it
seems reasonable to argue that the five years of data currently available on pricing
performance may be used to make some modest conclusions. Caution obviously is
in order given the possibility of results being due to random chance in a relatively
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: Frank Beurskens, Director of Product Strategy for e-markets; Jeffrey A. Brunoehler,
Market President of the AMCORE Bank in Mendota, Illinois; Renny Ehler, producer
in Champaign County, Illinois; Chris Hurt, Professor in the Department of Agricultural
Economics at Purdue University; Terry Kastens, Associate Professor in the Department
of Agricultural Economics at Kansas State University and producer 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 1999 pricing results for corn and soybeans.
The fourth section presents a summary of the combined results for the 1995, 1996,
1997, 1998 and 1999 crop years. The final section presents results on the tradeoff
between pricing performance and risk of market advisory services.
The market advisory services included in this evaluation do not
comprise the population of market advisory services available to producers. The
included services also are not a random sample of the population of market advisory
services. Neither approach is feasible because no public agency or trade group
assembles a list of advisory services that could be considered the "population."
Furthermore, there is not a generally agreed upon definition of an agricultural
market advisory service. To assemble the sample of services for the AgMAS Project,
criteria were developed to define an agricultural market advisory service and
a list of services was assembled.
The first criterion used to identify services is that a service
has to provide marketing advice to producers. Some of the services tracked by
the AgMAS Project do provide speculative trading advice, but that advice must
be clearly differentiated from marketing advice to producers for the service to
be included. The terms "speculative" trading of futures and options
versus the use of futures and options for "hedging" purposes are used
for identification purposes only. A discussion of what types of futures and options
trading activities constitute hedging, as opposed to speculating, is not considered
in this study.
The second criterion 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 evaluated by the AgMAS Project do
not make any futures and options recommendations. 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 considered.
A third, and fairly obvious, criterion is that the advice must
be transmitted to subscribers before the action is to be 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.
The original sample of market advisory services that met the three
criteria was drawn from the list of "Premium Services" available from
the two major agricultural satellite networks, Data Transmission Network (DTN)
and FarmDayta, in the summer of 1994.,  While the list of advisory
services available from these networks was by no means exhaustive, it did have
the considerable merit of meeting a market test. Presumably, the services offered
by the networks were those most in demand by farm subscribers to the networks.
In addition, the list of available services was cross-checked with other farm
publications to confirm that widely-followed advisory firms were included in the
sample. It seems reasonable to argue that the resulting sample of services was
(and remains) generally representative of the majority of advisory services available
The total number of advisory programs evaluated for the 1999 crop
year is 26 for corn and 25 for soybeans. The term “advisory program” is used
because several advisory services have more than one distinct marketing program.
Ag Line by Doane, Brock Associates, Pro Farmer, and Stewart-Peterson Advisory
Services each have two distinct marketing programs, Risk Management Group has
three distinct marketing programs and Agri-Visor has four distinct marketing programs.
Allendale provides two distinct programs for corn, but only one for soybeans.
For a variety of reasons, deletions and additions to the sample
of advisory programs has occurred over time. Zwicker Cycle Letter is included
in the study for the 1995 - 1998 crop years, however, it merged with Agri-Visor
for the 1999 crop year. Progressive Ag is included in the study for the 1996
- 1999 crop years, but was not included in 1995 because it had not yet come to
the Project's attention. Utterback Marketing Services is included in 1997 - 1999
crop years, but was not included in 1995 or 1996 because its marketing programs
were not deemed to be clear enough to be followed by the AgMAS Project. Ag Alert
for Ontario was included in 1996, but its advice is geared to Canadian producers
and was not deemed to be generalizable to U.S. producers, and subsequently was
dropped. Grain Field Report, Harris Weather/Elliott Advisory, North American
Ag, and Prosperous Farmer were in the study during 1995 and/or 1996, but are not
included in 1997 - 1999 because they no longer provide specific recommendations
regarding cash sales. Agri-Edge was included in previous reports, but the program
was discontinued during the 1997 crop year. Allendale futures & options and
Ag Line by Doane hedge programs for corn are first tracked for the 1996 crop year.
The Ag Line by Doane hedge program for soybeans is first tracked for the 1998
crop year. Cash Grain and Risk Management Group programs are first tracked for
the 1999 crop year.
Two forms of sample selection biases may be potential problems
when assembling an advisory program database. The first form is survival bias,
which occurs if only advisory programs that remain in business at the end
of a given period are included in the sample. Survival bias significantly biases
measures of performance upwards since "survivors" typically have higher
performance than "non-survivors." This form of bias should not be present
in the AgMAS database of advisory programs because all programs ever tracked are
included in the sample. The second and more subtle form of bias is hindsight
bias, which occurs if data from prior periods are "back-filled" at the
point in time when an advisory program is added to the database. Statistically,
this has the same effect as survivorship bias because data from surviving advisory
programs is back-filled. This form of bias should not be present in the AgMAS
database because recommendations are not back-filled when an advisory program
is added. Instead, recommendations are collected only for the crop year after
a decision has been made to add an advisory program to the database.
The actual daily process of collecting recommendations for the
sample of advisory programs begins with the purchase of subscriptions to each
of the programs. Staff members of the AgMAS Project read the information provided
by each advisory program on a daily basis. The information is received electronically,
via DTN, website or e-mail. For the programs 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.”
The recommendations of each advisory program are recorded separately.
Some advisory programs 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. In this situation, both strategies are
recorded and treated as distinct strategies to be evaluated.
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., 1999 crop year),
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 2000 futures reaches $2.40). When price targets are given
and not immediately filled, such as a stop order in the futures market, the recommendation
is noted until the order is either filled or 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 program.
Also, at the completion of the crop year, it is confirmed whether cash sales total
exactly 100 percent, 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 program. 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 program suggests “a producer might consider” 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
from that stated by the advisory program, or from that recorded by another subscriber.
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 crop year is considered
to be complete for each advisory program when cumulative cash sales of the commodity
reach 100 percent, all futures positions covering the crop are offset, all option
positions covering the crop are either offset or expire, and the advisory program
discontinues giving advice for that crop year. 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 programs, certain explicit assumptions are made.
These assumptions are intended to accurately depict “real-world” marketing conditions.
The simulation is designed to reflect conditions facing a representative
central Illinois corn and soybean producer. Whenever possible, data are collected
for the Central Crop Reporting District in Illinois as defined by the National
Agricultural Statistics Service (NASS) of the US Department of Agriculture (USDA).
The eleven counties (DeWitt, Logan, McLean, Marshall, Macon, Mason, Menard, Peoria,
Stark, Tazewell, and Woodford) that make up this District are highlighted in Figure
It should be noted that the relative results of the analysis are
likely to be similar if another geographic location is used. The calculated returns
to all the trading programs (as well as the benchmark prices) would most likely
“shift” due to basis differentials. However, the exact results may differ somewhat
for areas outside of central Illinois.
A two-year marketing window, spanning September 1, 1998 through
August 31, 2000, is used in the analysis. The beginning date is selected because
services in the sample generally begin to make recommendations around this date.
The ending date is selected to be consistent with the ending date for corn and
soybean marketing years as defined by the USDA. There are a few exceptions to
the marketing window definition. One advisory program had a relatively small
amount (10 percent) of cash corn and soybeans unsold as of August 31, 2000. These
bushels were sold in the spot cash market on September 1, 2000. One program maintained
relatively large (50 percent for corn and 66 percent for soybeans) long call “re-ownership”
positions for corn and soybeans until October and November 2000, respectively,
when they expired worthless. Finally, three advisory programs for corn and two
for soybeans began pre-harvest hedges prior to September 1, 1998. In all of the
previous cases, the actual recommendations on the indicated dates are recorded
and used in the analysis. Finally, note that throughout the remainder of this
report, the term "crop year" is used to represent the two-year marketing
The price assigned to each cash sale recommendation is the central
Illinois closing, or overnight, bid. The North and South Central Illinois Price
Reporting Districts are highlighted in Figure 2.
The data are collected and reported by the Illinois Department of Ag Market News.
The central Illinois price is the mid-point of the range of bids by
elevators in the North Central and South Central Price Reporting Districts, as
defined by the Illinois Department of Ag Market News. Prices in this 35-county
area best reflect prices for the assumed geographic location of the representative
central Illinois producer (Central Illinois Crop Reporting District).
Pre-harvest cash forward contract prices for fall delivery are
also needed. Pre-harvest bids collected by the Illinois Department of Ag Market
News are used when available. The central Illinois pre-harvest price is the mid-point
of the daily range of pre-harvest bids by elevators in the North Central and South
Central Price Reporting Districts, again, as defined by the Illinois Department
of Ag Market News. Pre-harvest forward prices from this source are available
for corn and soybeans from December 18, 1998 to September 10, 1999.
Since the marketing window for the 1999 corn and soybean crops
begins in September 1998, and the Illinois Department of Ag Market News did not
begin to report actual cash forward bids until December 18, 1998, pre-harvest
prices need to be estimated for the first few months of the marketing window.
For a date between September 1, 1998 and December 17, 1998, a two-step estimation
procedure is adopted. First, the forward basis for the period in question is
estimated by the average forward basis for the first five days actual forward
contract bids are reported by the Illinois Department of Ag Market News (December
Second, the estimated forward basis is added to the settlement price of the Chicago
Board of Trade (CBOT) 1999 December corn futures contract or 1999 November soybean
futures contract between September 1, 1998 and December 17, 1998. This estimation
procedure is expected to be a reasonably accurate reflection of actual forward
prices for the early period of the marketing window, as the actual price of the
harvest futures contract is used and only the forward basis is estimated.
Some market advisory programs recommended the use of post-harvest
forward contracts to sell part of the 1999 corn and soybean crops. The Illinois
Department of Ag Market News did report post-harvest bids for January 2000 delivery
from September 13, 1999 to December 10, 1999. They also report post-harvest bids
for March 2000 delivery from December 13, 1999 to January 31, 2000. These bids
for central Illinois are used wherever applicable. For the 1999 crop year, forward
bids were available to match all advisory service recommendations.
In the future, if the positions recommended by advisory programs
either do not match the delivery periods or are made after the Illinois Department
of Ag Market News stops reporting post-harvest forward contract prices, the following
procedure will be used to estimate the post-harvest forward contract prices needed
in the analysis. First, three elevators in central Illinois who agreed to supply
data on spot and forward contract prices on the dates when advisors made such
recommendations will be contacted. Each of these elevators is in a different
county in the Central Illinois Crop Reporting District (Logan, McClean, DeWitt).
Second, the spread between each elevator’s forward price and spot price will be
calculated for the relevant date. Third, the forward spread will be averaged
across the three elevators for the same date. Fourth, the average forward spread
from the three elevators will be added to the central Illinois cash price (discussed
at the beginning of the section) to arrive at an estimated post-harvest forward
contract price for central Illinois. This procedure was used in a few cases for
the 1998 crop year.
The fill prices for futures and options transactions generally
are the prices reported by the programs. In cases where a program 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.
Since most of the advisory program recommendations are given in
terms of the proportion of total production (e.g., “sell 5 percent of 1999 crop
today”), 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 percent of the corn crop translates into selling
5 bushels. When all of the advice for the marketing period 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 “lumpiness” 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
Yields and Harvest Definition
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 likely to be 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. The expected yield is based upon
a linear regression trend model of actual yields from 1972 through 1998 for the
Central Illinois Crop Reporting District. Previous research suggests a regression
trend model produces relatively accurate yield forecasts.
In central Illinois, the expected 1999 yield for corn is calculated
to be 145.6 bushels per acre (bpa). Therefore, recommendations regarding the
marketing quantity made prior to harvest, are based on yields of 145.6 bpa. For
example, a recommendation to forward contract 20 percent of expected 1999 production
translates into a recommendation to contract 29.12 bpa (20 percent of 145.6).
The actual reported corn yield in central Illinois in 1999 is 158 bpa. The same
approach is used for soybean evaluations. The calculated 1999 trend yield for
soybeans in central Illinois is 47.8 bpa, and the actual yield in 1999 is 49 bpa.
It is assumed that after harvest begins, producers have reasonable
ideas of what their actual realized yield will be. Since harvest occurs at different
dates each year, estimates of harvest progress as reported by NASS 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 percent 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 at
least 80 percent of the harvest.
For 1999, the harvest period for corn is defined as September 16,
1999 through October 20, 1999. For soybeans, the harvest period is September
23, 1999 through October 27, 1999. Therefore, for corn, recommendations made
after September 16 are applied on the basis of the actual yield of 158 bpa. For
soybeans, recommendations made after September 23 are applied on the basis of
the actual yield of 49 bpa.
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 harvest 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 program
advises forward contracting 50 percent of the corn crop prior to harvest; this
translates into sales of 72.8 bpa (50 percent of 145.6). However, when the actual
yield is applied to the analysis, sales-to-date of 72.8 bpa imply that only 46.1
percent of the actual crop has been contracted. In order to compensate, 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 percent increment of the 1999
crop, making the total recommended sales 60 percent of the crop, the recommendation
is adjusted to 13.92 percent of the actual yield (22 bushels), so that the total
crop sold to date is 60 percent of 158 bushels per acre (72.8 + 22 = 94.8 = 0.6*158).
After this initial adjustment, subsequent recommendations are taken as percentages
of the 158 bpa actual yield, so that sales of 100 percent of the crop equal sales
of 158 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 1999 corn futures contract for 25 percent of the
1999 crop prior to harvest. Since the amount hedged is based on the trend yield
assumption of 145.6 bpa, the futures position is 36.4 bpa (25 percent of 145.6).
After the yield assumption is changed, this amount represents a short hedge of
23.04 percent (36.4/158). The amount of the futures position is not adjusted
to move the position to 25 percent of the new yield figure. However, any futures
(or options) positions recommended after the beginning of harvest are implemented
as a percentage of the actual yield.
If actual yield is substantially below trend, and forward pricing
obligations are based on trend yields, a producer may have difficulty meeting
such obligations. This raises the issue of updating yield expectations in “short”
crop years to minimize the chance of defaulting on forward pricing obligations.
While not yet encountered in the AgMAS evaluations of corn and soybeans, this
situation has arisen in the evaluation of wheat.
As in wheat, a relatively simple procedure will be used to update
yield expectations in any future corn or soybean short crop years. First, trend
yield will be used as the expected yield until the August USDA Crop Production
Report is released, typically around August 10th. Second, if the
USDA corn or soybean yield estimate for the Central Illinois Crop Reporting District
is 20 percent (or more) lower than trend yield, a “reasonable” producer is assumed
to change yield expectations to the lower USDA estimate. Third, as with normal
crop years, the adjustment to actual yield is assumed to occur on the first day
The 20 percent threshold is intentionally relatively large for
at least three reasons. First, it is desirable to make adjustments to the trend
yield expectation on a limited number of occasions. Given the large variability
in annual yields, a small threshold could result in frequent adjustments. Second,
it is not uncommon for early yield estimates to deviate significantly from the
final estimate. A small threshold could result in unnecessary adjustments prior
to harvest. Third, yield shortfalls of less than 20 percent are unlikely to create
delivery problems for a producer.
Brokerage costs are incurred when producers open or close positions
in futures and options markets. For the purposes of this study, it is assumed
that brokerage costs are $50 per contract for round-turn 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 $0.01 per bushel
for a round-turn futures transaction and 0.6 cents per bushel for each options
LDP and Marketing Assistance Loan Payments
While the 1996 “Freedom-to-Farm” Act did away with government set-aside
and target price programs, price protection for producers in program crops such
as corn and soybeans was not eliminated entirely. Minimum prices are established
through a “loan” program.  Specifically, if market prices are
below the Commodity Credit Corporation (CCC) loan rate for corn or soybeans, producers
can receive payments from the US government that make up the difference between
the loan rate and the lower market price. There
is considerable flexibility in the way the loan program can be implemented by
producers. This flexibility presents the opportunity for advisory programs to
make specific recommendations for the implementation of the loan program. Additionally,
the prices of both corn and soybeans were below the loan rate during significant
periods of time in the 1999-2000 marketing year, so that use of the loan program
was an important part of marketing strategies. As a result, net advisory program
prices may be substantially impacted by the way the provisions of the loan program
Nearly all of the advisory programs tracked by the AgMAS project
for the 1999 crop year make specific recommendations regarding the timing and
method of implementing the loan program for the entire corn and soybean crops. These recommendations are implemented
as given wherever feasible. Several decision rules have to be developed even
in this case, in particular, for pre-harvest forward contracts. For one corn
program, loan recommendations are not made at all. In this case, it is necessary
to develop a more complete set of decision rules for implementing the loan program.
All loan-related decision rules are based on the assumption of a “prudent” or
“rational” producer, within the context of the intent of the loan program. More
specifically, it is assumed that a producer will take advantage of the price protection
offered by the loan program, even in the absence of specific advice from an advisory
Before describing the decision rules, it is useful to provide a
brief overview of the loan program mechanics. Then, the rules developed to implement
the loan program in the absence of specific recommendations can be described more
There are two mechanisms for implementing the price protection
benefits of the loan program. The first mechanism is the loan deficiency payment
(LDP) program. LDPs are computed as the difference between the loan rate for
a given county and the posted county price (PCP) for a particular day. PCPs are
computed by the USDA and change each day in order to reflect the “average” market
price that exists in the county. For example, if the county loan rate for corn
is $2.00 per bushel and the PCP for a given day is $1.50 per bushel, then the
next day LDP is $0.50 per bushel. If the PCP increases to $1.60 per bushel, the
LDP will decrease to $0.40 per bushel. Conversely, if the PCP decreases to $1.40
per bushel, the LDP will increase to $0.60 per bushel.
LDPs are made available to producers over the period beginning
with corn or soybean harvest and ending May 31st of the calendar year
following harvest. Producers have flexibility with regard to taking the LDP.
They may simply elect to take the payment when the crop is sold in a spot market
transaction (before the end of May in the particular marketing year). Or, producers
can choose to take the LDP before the crop is delivered and sold. Note that LDPs
for the 1999 crop cannot be taken after a crop has been delivered and title has
The second mechanism is the nonrecourse marketing assistance loan
program. A loan cannot be taken on any portion of the crop for which an LDP has
been received. Under this program, producers may store the crop (on the farm
or commercially), maintain beneficial interest, and receive a loan from the CCC
using the stored crop as collateral. The loan rate is the established rate in
the county where the crop is stored and the interest rate is established at the
time of loan entry. Corn and soybean crops can be placed under loan anytime after
the crop is stored through May 31st of the following calendar year.
The loan matures on the last day of the ninth month following the month in which
the loan was made.
Producers may settle outstanding loans in two ways: i) repaying
the loan during the 9-month loan period, or ii) forfeiting the crop to the CCC
at maturity of the loan. Under the first alternative, the loan repayment rate
is the lower of the county loan rate plus accrued interest or the marketing loan
repayment rate, which is the PCP. If the PCP is below the county loan rate, the
economic incentive is to repay the loan at the posted county price. The difference
between the loan rate and the repayment rate is a marketing loan gain (MLG).
If the PCP is higher than the loan rate, but lower than the loan rate plus accrued
interest, the incentive is also to repay the loan at the PCP. Interest is charged
on the difference between the PCP and the loan rate. If the PCP is higher than
the loan rate plus accrued interest, the incentive is to repay the loan at the
loan rate plus interest.
Under the second alternative, the producer stores the crop to loan
maturity and then transfers title to the CCC. The producer retains the proceeds
from the initial loan. This was generally not an attractive alternative in the
1999 marketing year since the PCP was often below the cash price of corn and soybeans.
Repaying the loan at the PCP and selling the crop at the higher cash price was
economically superior to forfeiture.
The nonrecourse loan program establishes the county loan rate as
a minimum price for the producer, as does the LDP program. For the 1999 crop,
the sum of LDPs plus marketing loan gains was subject to a payment limitation
of $150,000 per person. Forfeiture on the loans provided the mechanism for receiving
a minimum of the loan rate on bushels in excess of the payment limitation.
The average loan rates for the 1999 corn and soybean crops across
the eleven counties in the Central Illinois Crop Reporting District (DeWitt, Logan,
McLean, Macon, Marshall, Mason, Menard, Peoria, Stark, Tazewell, and Woodford)
are $1.95 and $5.42 per bushel, respectively. Market prices fell below these
loan rates for extended periods of time during the 1999 marketing year. This
is reflected in Figure 3, which shows the corn and
soybean LDP or MLG rates for central Illinois during the 1999 marketing year.,  For corn,
LDPs or MLGs are relatively high during harvest, varying from $0.20 to $0.35 per
bushel, and then fall to zero or near zero during winter and spring. As cash
corn prices fall during the summer of 2000, corn MLGs increase rapidly and reach
the highest level for the 1999 crop year ($0.50 per bushel). Soybean LDPs or
MLGs are high during the 1999 harvest time, varying from $0.80 to $1.00 per bushel.
During the winter and spring, it decreases to almost zero, but is positive over
the time. As cash soybean prices fall during the summer of 2000, soybean MLGs
increase rapidly from zero and peak at $1.20 per bushel in August 2000.
Decision Rules for Programs with a Complete Set of Loan Recommendations
If an advisory program makes a complete set of loan recommendations,
the specific advice is implemented wherever feasible. However, specific decision
rules are still needed regarding pre-harvest forward contracts because it is possible
for an advisory program to recommend taking the LDP on those sales before it is
actually harvested and available for delivery in central Illinois. To begin,
it is assumed that amounts sold for harvest delivery with pre-harvest forward
contracts are delivered first during harvest. Since LDPs must be taken when title
to the grain changes hands, LDPs are assigned as these “forward contract” quantities
are harvested and delivered. This necessitates assumptions regarding the timing
and speed of harvest. Earlier it was noted that a five-week harvest window is
used to define harvest. This window is centered on the day nearest to the mid-point
of harvest progress as reported by NASS. Various assumptions could be implemented
regarding harvest progress during this window. Lacking more precise data, a reasonable
assumption is that harvest progress for an individual, representative farm is
a linear function of time.
Tables 1 and 2 summarize the information
used to assign LDPs to pre-harvest forward contracts. The second column shows
the amount harvested assuming a linear model. The third column shows the LDP available
on each date of the harvest window and the fourth column presents the average
LDP through each harvest date. An example will help illustrate use of the tables.
Assume that an advisory program recommends, at some point before harvest, that
a producer forward contract 50 percent of expected soybean production. This translates
into 23.9 bpa when the percentage is applied to expected production (0.50 * 47.8
= 23.9). Next, convert the bpa to a percentage of actual production, which is
48.8 percent (23.9/49 = 48.8). To determine the LDP payment on the 48.8 percent
of actual production forward contracted, simply read down Table
2 to 10/11/99, which is the date when 48.8 percent of harvest is assumed to
be complete. The average LDP up to that date (09/23/99 - 10/11/99) is $0.89 per
bushel; the last column of Table 2. This is the LDP amount assigned to the forward
Note that LDPs for any sales (spot, forward contracts, futures
or options) recommended during harvest are taken only after all forward contract
obligations are fulfilled. In addition, crops placed under loan by an advisory
program do not accumulate interest opportunity costs because proceeds from the
loan can be used to offset interest costs that otherwise would accumulate.
Decision Rules for Programs with a Partial Set of Loan Recommendations or
No Loan Recommendations
If an advisory program makes a partial set of loan recommendations,
the available advice is implemented wherever feasible. In the absence of specific
recommendations, it is assumed that crops priced before May 31, 2000 are not placed
under loan. Those crops receive program benefits through LDPs. After May 31,
2000, eligible crops (unpriced crops for which program benefits have not yet been
collected) are assumed to be under loan until priced.
In the absence of specific recommendations, rules for assigning
LDPs and MLGs are developed under the assumption that loan benefits are established
when the crop is priced or as soon after pricing that is allowed under the rules
of the program. This principle is consistent with the intent of the loan program
to fix a minimum price when pricing decisions are made. Two rules are most important
in the implementation of this principle. First, LDP’s on pre-harvest sales (forward
contracts, futures or options) are established as the crop is harvested. Second,
if the LDP or MLG is zero on the pricing date, or the first date of eligibility
to receive a loan benefit, those values are assigned on the first date when a
positive value is observed, assuming a beneficial interest in that portion of
the crop has been maintained. Specific rules for particular marketing tools and
forward contracts. The same decision rules are applied as discussed in the
previous section. Specifically, it is assumed that amounts sold for harvest delivery
with pre-harvest forward contracts are delivered first during harvest. LDPs,
if positive, are assigned as these “forward contract” quantities are harvested
and delivered. This necessitates assumptions regarding the timing and speed of
harvest. A linear model of harvest progress is assumed in the five-week harvest
window. The specific information used to assign LDPs to pre-harvest forward contracts
is again found in Tables 1 and 2. As a final point,
note that LDPs for any other sales (spot, futures or options) recommended during
harvest are taken only after all pre-harvest forward pricing obligations are fulfilled.
short futures. Pre-harvest pricing using futures contracts is treated in
the same manner as pre-harvest forward contracts. LDPs are assigned on open futures
positions as the crop is harvested, or as soon as a positive LDP is available,
if the futures position is still in place and cash sales have not yet been made.
These are assigned after forward contracts have been satisfied. If the underlying
crop is sold before there is a positive LDP, then that portion of the crop receives
a zero LDP. During the harvest window, if the futures position is offset before
a positive LDP is available and the crop has not yet been sold in the cash market,
that portion of the crop is eligible for loan benefits on the next pricing recommendation.
put option purchases. Long put option positions, which establish a minimum
futures price, are treated in the same manner as pre-harvest short futures.
forward contracts. The main issue with respect to post-harvest forward contracts
is when to assign the LDPs or MLGs. Those can be established on the date the
contract is initiated, on the delivery date of the contract, or anytime in between.
Following the general principle outlined earlier, LDPs and MLGs for post-harvest
contracts are assigned on the date the contract is initiated or the first day
with positive benefits prior to delivery on the contract.
short futures. As with post-harvest forward contracts, the main issue with
post-harvest short futures positions is when to assign loan benefits. These are
assigned when the short futures position is initiated or as soon as a positive
benefit is available if the futures position is still in place and cash sales
have not been made. If the underlying crop is sold before a positive LDP is available,
that portion of the crop receives a zero LDP. If the short futures position is
offset before a positive LDP is available and the cash crop has not yet been sold,
that portion of the crop is eligible for loan benefits on the next pricing recommendation.
long put positions. Long put option positions established after the crop
is harvested are treated in the same manner as post-harvest short futures
sales before May 31, 2000. If a spot cash sale of corn or soybeans is recommended
before May 31, 2000, it is assumed that the LDP, if positive, is established that
program after May 31, 2000. Since LDPs are not available after May 31, 2000,
it is assumed that any corn or soybeans in storage and not priced as of this date,
for which loan benefits have not been established, are entered in the loan program
on that date. This is a reasonable assumption since spot prices are below the
loan rate for both soybeans and near the loan rate or corn in central Illinois
on May 31, 2000 and a prudent producer would take advantage of the price protection
offered by the loan program. When the crops are subsequently priced (cash sale,
forward contract, short futures, or long put option), the marketing loan gain,
if positive, is assigned on that day. Forfeiture is not an issue for these bushels
because all cash sales were made before the end of the nine-month loan period.
Note also that the $150,000 payment limitation is not considered in the analysis,
as production is based on one acre of corn and/or soybeans.
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.
Storage charges are assigned beginning October 21 for corn and
October 28 for soybeans, the first dates after the end of the respective harvest
windows. Physical storage charges are assumed to be a flat $0.13 per bushel from
the end of harvest through December 31. After January 1, physical storage charges
are assumed to be $0.02 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 for the 1999 crop quoted in a telephone survey of nine central Illinois
The interest rate is assumed to be 9.2 percent 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 1999 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 end of harvest 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 charge,” is commonly deducted by commercial elevators
on “dry” corn that is delivered to the elevator to be stored, and reflects a charge
for drying and volume reduction (shrinkage) that occurs in drying the corn from
(typically) 15 percent to 14 percent moisture. The charge for drying is a flat
$0.02 per bushel, while the charge for volume reduction is 1.3 percent per bushel.
Given that the harvest-time cash price in central Illinois for 1999 is $1.74 per
bushel, the charge for volume reduction is 2.3 cents per bushel ($1.74 * 0.013).
Therefore, the flat shrink charge assigned to all stored corn is 4.3 cents per
It should be noted that the cost of drying corn down to 15 percent
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.
The calculation of carrying charges may be impacted by an advisory
program’s loan recommendations and/or the decision rules discussed in the previous
section. Specifically, during the period corn or soybeans are placed under loan,
interest costs are not accumulated, as the proceeds from the loan can be used
to offset interest opportunity costs that otherwise would accumulate. This most
commonly occurs after May 31, 2000, when it is assumed that all unpriced grain
is placed under loan until priced. If a crop is priced (forward contracts, futures
or options) while under loan but stored beyond the time of pricing, interest opportunity
costs are accumulated from the day of pricing until the time storage ceases (since
it is assumed the loan is repaid on the date of pricing).
Finally, it could be argued that interest opportunity costs should
be charged based on the LDP available at harvest but not taken by an advisory
program. This adjustment is not made because it would not substantially impact
the results due to the small interest opportunity costs involved.
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
are available for a particular crop, and provide an indication of how producers
might fare using some basic marketing strategies that do not require professional
Conceptually, a useful benchmark should: i) be simple to
understand and to calculate; ii) represent the returns to a marketing strategy
that could be implemented by producers; iii) be directly comparable
to the net advisory price received from following the recommendations of a market
advisory program; iv) not be a function of the actual recommendations of the advisory
programs or of the actual marketing behavior of producers, but rather should be
external to their marketing activities; and v) 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
In the 1995 and 1996 AgMAS corn and soybean pricing performance
reports, two market benchmark prices are reported: the average harvest-period
price in central Illinois and the average price received by Illinois producers
(as reported by USDA). However, research conducted by the AgMAS Project indicates
that these benchmarks have some weaknesses that make them less than ideal indicators
of the price offered by the market for a given crop.
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 producers is not
directly comparable to the net advisory price as calculated in this study because
the average price received includes price discounts that are incurred because
some grain marketed is of substandard quality, while the AgMAS Project assumes
that all grain marketed meets the requirements of No. 2 yellow corn or No. 1 soybeans.
In the 1997 AgMAS corn and soybean pricing performance report,
a new market benchmark price is introduced: the average cash price stated on a
harvest equivalent basis for corn and soybeans over the entire marketing period.
For the 1999 crop, the benchmark is based on the average price over the 1999 crop
year, which began on September 1, 1998 and ended on August 31, 2000. Cash forward
prices for central Illinois are used during the 1999 pre-harvest period, while
daily spot prices for central Illinois are used for the 1999 post-harvest period.
The same forward and spot price series applied to advisory program recommendations
are used to construct the benchmark. Details on the forward and cash price series
can be found in the earlier “Prices” section of this report.
The average cash price benchmark meets all of the selection criteria
listed above, except it cannot be easily implemented by producers 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 routinely selling twelve times 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 programs.
Three 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. The first is to take a weighted average price, to
account for changing yield expectations, instead of taking the simple average
of the daily prices. This adjustment is consistent with the procedure described
previously in the "Yields and Harvest Definition" 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 is to compute post-harvest
cash prices on a harvest equivalent basis, which is done by subtracting carrying
charges (storage, interest and shrink) from post-harvest spot cash prices. The
daily carrying charges are calculated in the same manner as those for net advisory
A third adjustment to the average cash price benchmark is new with
the 1998 and 1999 reports. In the context of evaluating advisory program recommendations,
it was argued earlier that a “prudent” or “rational” producer would take advantage
of the price protection offered by the loan program, even in the absence of specific
advice from an advisory program. This same logic suggests that a “prudent” or
“rational” producer will take advantage of the price protection offered by the
loan program when following the benchmark average price strategy. Based on this
argument, the average cash price benchmark is adjusted by the addition of LDPs
and MLGs. Bushels marketed in the pre-harvest period according to the benchmark
strategy (approximately 48 percent for corn and 52 percent for soybeans) are treated
as forward contracts with the LDPs assigned at harvest. Bushels marketed each
day in the post-harvest period (approximately 52 percent for corn and 48 percent
for soybeans) are awarded the LDP or MLG in existence for that particular day.
Finally, just as in the case with comparable advisory program recommendations,
interest opportunity costs are not charged to the benchmark after May 31, 2000
to reflect the assumption that stored grain is placed under loan.
1999 Pricing Performance Results for the Advisory Programs
Pricing performance results for the 1999 corn and soybean crops
are presented in Tables 3 through
5 and Figure 4. For a specific example of how the marketing recommendations
are translated into a final net advisory price that incorporates the simulation
assumptions, please refer to the 1996 AgMAS Pricing Report.
The program-by-program results of the evaluation of corn marketing
programs are contained in Table 3. This table shows the breakout of the components
of the net advisory price as well as the net advisory price itself. The 1999
average net advisory price for all 26 corn programs is $2.02 per bushel. It is
computed as the unadjusted cash sales price ($1.92 per bushel) minus carrying
charges ($0.16 per bushel) plus futures and options gain ($0.05 per bushel) minus
brokerage costs ($0.02 per bushel) plus LDP/MLG gain ($0.23 per bushel). The
average net advisory price for corn is three cents below the market benchmark
price. The range of net advisory prices for corn is fairly large, with a minimum
of $1.66 per bushel and a maximum of $2.49 per bushel.
Table 4 lists the program-by-program
results of the soybean evaluations. The 1999 average net advisory price for all
25 soybean programs is $5.67 per bushel. It is computed as the unadjusted cash
sales price ($4.74 per bushel) minus carrying charges ($0.17 per bushel) plus
futures and options gain ($0.22 per bushel) minus brokerage costs ($0.02 per bushel)
plus LDP/MLG gain ($0.92 per bushel). The average net
advisory price for soybeans is seventeen cents per bushel above the market benchmark
price. The range of net advisory prices for soybeans is exceptionally large,
with a minimum of $4.68 per bushel and a maximum of $7.10 per bushel.
A point to consider when examining Tables
3 and 4 is the impact of the assumption that all storage occurs off-farm.
It is possible to argue that short-run marginal costs of on-farm grain storage
are zero if the facilities already exist and variable costs associated with handling
grain and maintaining grain quality are not included. Excluding the costs of
commercial storage entirely (but continuing to subtract interest costs), the average
net advisory price for corn increases to $2.15 per bushel and the net advisory
price for soybeans increases to $5.77 per bushel.
The calculation of the market benchmark price also is impacted by such a change
in the storage cost assumption, with the market benchmark price rising to $2.16
per bushel for corn and $5.58 per bushel for soybeans. Therefore, if physical
storage charges are assumed to be zero, the average net advisory price for corn
is one cent below the market benchmark price, and the average net advisory price
for soybeans is nineteen cents above the market benchmark price. Hence, there
is only a minimal impact of changing storage assumptions on the pricing results.
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 program. It is assumed that the representative producer splits acreage
equally (50/50) between corn and soybeans and achieves corn and soybean yields
equal to the actual yield for the area in 1999. The 50/50 advisory revenues are
computed on a per acre basis and compared with the revenue a central Illinois
producer could have received based on the market benchmark price for both corn
and soybeans. Advisory revenue per acre is calculated only for those programs
that offer both corn and soybean marketing advice.
Table 5 lists the program-by-program
results of the 50/50 revenue analysis. The average revenue achieved by following
both the corn and soybean programs offered by an advisory program is $299 per
acre, $2 per acre above the market benchmark revenue for 1999 crop year. The spread
in advisory revenue also is especially noteworthy, with the difference between
the bottom- and top-performing advisory programs reaching more than $100 per acre.
For comparison purposes, the annual subscription cost of each advisory
program also is listed in the last column of Table 5.
Subscription costs average $322 per program, about equal to the average advisory
revenue for one acre of production, split 50/50 between corn and soybeans. Subscription
costs do not appear to be large relative to total farm revenue, whether a large
or small farm is considered. For a 1,000 acre farm, subscription costs average
about one-tenth of one percent of total advisory revenue. For a 250 acre farm,
subscription costs average about four-tenths of one percent of total advisory
revenue. Note that subscription costs are not subtracted from any of the revenue
figures presented in Table 5.
Another view of the pricing performance of the advisory programs
is shown in Figure 4. Here, net advisory prices
or revenues are ranked from highest to lowest and plotted versus the market benchmark.
As shown in the top chart, 14 of the 26 corn marketing programs achieve a net
price that is equal to or higher than the market benchmark price. As reported
in the middle chart, 15 of the 25 soybean programs achieve a net advisory price
equal to or higher than the market benchmark price. The bottom chart shows the
comparison between 50/50 advisory revenue and the revenue implied by market benchmark
prices. Advisory revenue is greater than the market benchmark revenue for 13
out of 25 programs. Note that the same advisory programs do not necessarily exceed
the market benchmarks in each of the comparisons in Figure 4.
Figure 5 shows the pattern of corn
prices for the 1999 crop year. The top chart shows daily cash prices from September
1, 1998 through August 31, 2000. The pre-harvest prices are the cash forward contract
prices for harvest delivery. The middle chart is a repeat of the top chart with
daily LDP or MLG added to the daily price. For the pre-harvest period, the LDP
is the average LDP available at harvest time. The third chart offers a different
perspective, in that during the post-harvest period the daily cash price is adjusted
for cumulative carrying costs (shrink, interest, and storage charges). The chart
illustrates the pattern of harvest equivalent prices plus LDP or MLG.
Corn prices for the 1999 crop year are highest in the pre-harvest
period, with the cash forward contract price remaining above $2.00 per bushel
until the beginning of July 1999. Prices declined into harvest and made a post-harvest
recovery during the spring of 2000. New lows were made in the summer of 2000
on the basis of the prospects for another large harvest. The price pattern was
typical for a large crop year followed by another large crop.
LDPs were positive at harvest time, but cash prices moved above
the Commodity Credit Corporation (CCC) loan rate in the early spring months. Marketing
loan gains were large in August. When adjusted for carrying costs, prices declined
slightly during the winter and spring and moved to extremely low levels in August
2000. The price pattern for the 1999 crop year favored those who made early pre-harvest
sales and penalized those who stored a large portion of the crop unpriced late
into the crop year.
Figure 6 shows the pattern of soybean
prices for the 1999 crop year. The three charts are the same as for corn, depicting
daily cash prices, cash prices plus LDP/MLG, and cash prices plus LDP/MLG minus
Soybean prices for the 1999 crop followed a pattern similar to
that for corn, except that the pre-harvest price decline started earlier. Pre-harvest
forward contract prices were generally above $5.50 per bushel only until January
1999. Prices made a pre-harvest low, managed a modest post-harvest recovery, and
then declined sharply into the last part of the marketing window. The post-harvest
rally was associated with a brief period of concern about the South American crop
and a typical post-harvest strengthening of the basis. The South American crop
turned out to be large and US producers planted record soybean acreage in the
spring of 2000. The 2000 harvest was the fourth consecutive large harvest in the
US. Like corn prices, the pattern of soybean prices was classic for a large crop
year followed by another large crop. LDPs were large at harvest time. Cash prices
moved near the loan rate for a brief period in early May and then LDP/MLGs became
large in the summer of 2000.
The 1999/2000 price pattern for soybeans favored those who made
sales very early and penalized those who stored the crop unpriced late into the
marketing year. The penalty was especially large for those who established the
LDP at harvest and stored the crop unpriced into the summer of 2000.
Average Pricing Performance Results for the Advisory Programs
A summary of the results of the pricing performance evaluations
for the 1995 through 1999 corn and soybean crop years is contained in Tables
6 through 11 and Figures 7 through 10. The
results for the 1995 through 1998 crop years are those contained in the 1998 AgMAS
Corn and Soybean Pricing Report.
Tables 6, 8 and 10 present pricing results for each
year, while Tables 7, 9 and 11 show two-year averages
(1998-1999), three-year averages (1997-1999), four-year averages (1996-1999),
and five-year averages (1995-1999). Some marketing programs are not included in
all of the averages. For example, the five-year average is calculated only for
the 18 marketing programs that were evaluated for all five years. The following
discussion focuses on the five-year average results.
As shown in Table 7, the average
net advisory corn price over the five years for the 18 programs is $2.42 per bushel,
one cent below the five-year market benchmark price of $2.43 per bushel. The
results range from a low of $2.27 to a high of $2.76 per bushel.
The five-year results for soybeans are listed in Table
9. The average net advisory soybean price over the five years is $6.32 per
bushel, $0.12 above the five-year market benchmark price of $6.20 per bushel.
The results range from a low of $5.99 to a high of $6.79 per bushel.
The five-year results for advisory revenue are presented in Table
11. The average advisory revenue for the five years is $319 per acre. This
is $1 per acre higher than the five-year market benchmark revenue. The results
range from a low of $305 to a high of $353 per acre.
As shown in the top chart in Figure 10,
5 of the 18 corn marketing programs achieve a five-year average net advisory
price that is above the five-year average market benchmark price of $2.43 per
bushel. The middle chart in Figure 10 shows that 14 of the 18 soybean programs
achieve a five-year average price that is equal or above the five-year average
market benchmark price of $6.20 per bushel. The bottom chart in Figure 10 shows
the comparison of the five-year average advisory revenue versus the five-year
average revenue implied by the market benchmark price. Eight of the 18 advisory
programs achieve a four-year average revenue that is equal or above average market
benchmark revenue of $318 per acre.
Pricing Performance and Risk of the Advisory Programs
An advisory program’s net price received is an important indicator
of performance. However, pricing performance almost certainly is not the only
relevant indicator. For example, two advisory programs may generate the same average
net price across marketing periods, but the risk of the programs may differ substantially.
The difference in risk may be the result of: i) type of recommended pricing tool
(cash, forward, futures, options, etc.), ii) timing of sales, and iii) implementation
of marketing strategies.
In order to quantify the risk of advisory programs, a definition
of risk must be developed. Risk is usually thought of as the possibility or probability
of loss. A natural extension of this idea looks at risk as the chance producers
will fail to achieve the net price they expect based on following an advisory
program. This approach to quantifying risk does not measure the possibility of
loss alone. Risk is seen as uncertainty – the likelihood that what is expected
will fail to happen, whether the outcome is better or worse than expected. So
an unexpected return on the upside or the downside – a net price of $2.50 or $1.50
per bushel when a net price of $2.00 per bushel is expected – counts in determining
the “risk” of an advisory program. Thus, an advisory program whose net price
does not depart much from its expected, or average, net price is said to carry
little risk. In contrast, an advisory program whose net price is quite volatile
from year-to-year, often departing from expected net price, is said to be quite
This approach to defining risk can be quantified by using a statistical measure
called the standard deviation. It measures the dispersion of year-to-year
net advisory prices from the average net price. One can think of the standard
deviation as the “typical” variation in net price from year-to-year. The larger
the standard deviation of an advisory program, the less likely a producer is to
get exactly the net price expected, though it is possible by chance to get a higher
price instead of a lower one for any particular time period.
Separate analysis of market advisory pricing performance and risk
will provide valuable information to producers. However, as economic theories
of decision-making under risk highlight, it is the tradeoff between pricing performance
and risk that is likely to be of greatest interest to producers.
Theory suggests that above-average pricing performance should be possible only
if marketing strategies are recommended that have above-average risk (and vice
versa). Faced with such a choice set, producers will choose an advisory program
that has a pricing-risk tradeoff that is consistent with their risk preferences.
The basic data needed for assessing the pricing-risk tradeoff of
market advisory programs is presented in Table 12.
For each advisory program tracked in all five years of AgMAS evaluations, the
five-year average net advisory price or revenue and standard deviation of net
advisory price or revenue is reported. The standard deviations indicate that
the risk of advisory programs varies substantially. In corn, the standard deviations
range from a low of $0.19 per bushel to a high of $0.75 per bushel. The average
standard deviation across the 18 corn programs is $0.43 per bushel, which is higher
than the $0.34 per bushel standard deviation of the corn market benchmark. In
soybeans, the standard deviations range from a low of $0.29 per bushel to a high
of $1.10 per bushel. The average standard deviation across the 18 soybean programs
is $0.70 per bushel, which also is higher than the $0.59 per bushel standard deviation
of the soybean market benchmark. Finally, revenue standard deviations for the
18 programs range from a low of $19 per acre to a high of $46 per acre. The average
revenue standard deviation across the 18 programs is $34 per bushel, higher than
the $28 per acre standard deviation of the market benchmark.
The estimated relationship between pricing performance and risk
for corn is presented in Figure 11. As economic
theory predicts, there is a positive tradeoff between the average price and standard
deviation; securing a higher net corn price generally requires that an advisory
program take on more risk, and vice versa. The strength of the relationship
is measured by the correlation coefficient, which can take on values between –1
and +1. A negative value means that net price and standard deviation tend to
move in opposite directions, while a positive value means they tend to move in
the same direction. The closer a correlation coefficient is to –1 or +1, the
stronger the tendency. Since the estimated correlation coefficient for corn is
+0.55, a modestly strong relationship is indicated.
The performance implications of the tradeoff between corn pricing
performance and risk are explored in Figure 12.
The chart is the same as in Figure 11, except it
is now divided into four quadrants based on the average price and standard deviation
of the market benchmark. Advisory programs in the upper left quadrant have a
higher price and less risk than the benchmark, which is the most desirable outcome
from a producer’s perspective. Advisory programs in the lower right quadrant
have a lower price and more risk than the benchmark, which is the least desirable
outcome from a producer’s perspective. The two remaining quadrants reflect a
higher price and more risk than the market benchmark or a lower price and less
risk than the market benchmark. A producer may prefer an advisory program to
the market benchmark in either of these two quadrants, but this depends on personal
preference for risk relative to return.
The data plotted in Figure 12 show
there is only one advisory program in corn that generates a combination of net
price and risk superior to the market benchmark (upper left quadrant). In contrast,
nine advisory programs in corn produce a combination that is inferior to the benchmark
(lower right quadrant). Only four programs have a lower price and less risk than
the benchmark, while nine programs have a higher price and more risk.
The estimated relationship between pricing performance and risk
for soybeans is presented in Figure 13. Contrary
to the prediction of economic theory, there is a negative tradeoff between the
average price and standard deviation; achieving a higher net advisory price appears
to require that an advisory program take on less risk, and vice versa.
The estimated correlation coefficient for soybeans is –0.36, so the relationship
is only weakly negative.
The data plotted in Figure 14 show
there are four advisory programs in soybeans that generate a combination of net
price and risk superior to the market benchmark (upper left quadrant). Four advisory
programs in soybeans produce a combination that is inferior to the benchmark (lower
right quadrant). No program has a lower price and less risk than the benchmark,
while ten programs have a higher price and more risk.
The estimated relationship between performance and risk for corn
and soybean 50/50 revenue is presented in Figure 15.
There is a positive tradeoff between average revenue and standard deviation; producing
higher revenue generally requires that an advisory program take on more risk,
and vice versa. The estimated correlation coefficient for revenue is +0.47,
indicating a modestly strong relationship between average revenue and risk.
Based on 50/50 revenue, the data plotted in Figure
16 show that no advisory program generates a combination of average revenue
and risk superior to the market benchmark (upper left quadrant). Seven advisory
programs produce a revenue combination that is inferior to the benchmark (lower
right quadrant). Only three programs have lower revenue and less risk than the
benchmark, while eight programs have higher revenue and more risk.
Previous research on financial investments suggests that return-risk
results, like those presented above, may be sensitive to alternative specifications
of the market benchmark. To investigate this issue, the pricing (or revenue)
performance and risk of market advisory programs is compared to a 20-month average
cash price benchmark in Figures 17 through 19. Compared
to the 24-month benchmark, the 20-month benchmark simply deletes the first four
months of each marketing window from the computations of the benchmark price.
The change has only a limited impact on the average benchmark price or revenue
for the five years of analysis. For corn, the average 20-month benchmark price
is $2.42 per bushel, compared to $2.43 per bushel for the 24-month benchmark.
For soybeans, the average 20-month benchmark price is $6.15 per bushel, compared
to $6.20 per bushel for the 24-month benchmark. For 50/50 revenue, the average
20-month benchmark revenue is $314 per acre, compared to $318 per acre for the
24-month benchmark. The small differences are not surprising given the nature
of the average cash price benchmarks. In informationally efficient markets, annual
averages of different average cash price benchmarks should be roughly similar
when stated on a harvest equivalent basis.
The previous logic does not necessarily carry over to the standard
deviations of the alternative benchmarks. Standard deviations for the 20-month
benchmark should be higher than those of the 24-month benchmark because the 20-month
benchmark includes less pre-harvest forward contracting than the 24-month benchmark.
All else equal, less pre-harvest forward contracting should lead to increased
risk. The standard deviation estimates are consistent with this logic. For corn,
the standard deviation for 20-month benchmark price is $0.44 per bushel, compared
to $0.34 per bushel for the 24-month benchmark. For soybeans, the standard deviation
for 20-month benchmark price is $0.74 per bushel, compared to $0.59 per bushel
for the 24-month benchmark. For 50/50 revenue, the standard deviation for 20-month
benchmark revenue is $33 per acre, compared to $28 per acre for the 24-month benchmark.
It is interesting to note that the risk of the 20-month benchmark approximately
matches the average risk of net advisory prices in corn, soybeans and 50/50 revenue.
The comparisons in Figures 17 through
19 indicate that the risk-return performance of market advisory programs is
sensitive to the change in market benchmarks. This is most notable for the upper
left performance quadrant, where advisory programs have higher prices and less
risk than the market benchmark. Three advisory programs generate average corn
prices and risk in the upper left quadrant based on the 20-month benchmark, compared
to only one with the 24-month benchmark. Twelve advisory programs generate average
soybeans prices and risk in the upper left quadrant based on the 20-month benchmark,
compared to only four with the 24-month benchmark. Six advisory programs generate
average 50/50 revenue and risk in the upper left quadrant based on the 20-month
benchmark, compared to none with the 24-month benchmark.
While return-risk results are sensitive to alternative benchmarks,
it is important to emphasize, whether a 24-month or 20-month benchmark is considered,
that about half of the advisory programs generate average prices and risk in the
higher price/more risk or lower price/less risk quadrants. Hence, producing a
higher average price or revenue typically requires that an advisory program take
on more risk, and vice versa.
Overall, the results presented in this section suggest performance
analysis may be markedly affected by the inclusion of risk. As an example, consider
the case of soybeans using a 24-month benchmark. If only one dimension of performance
is considered, the average net advisory price over the five-year period, 14 of
the 18 soybean programs “beat” the 24-month market benchmark. However, when two
dimensions of performance are considered, average price and standard deviation,
only four programs “beat” the 24-month market benchmark in soybeans. The other
10 programs did not beat the market in a return-risk framework because they took
on more risk to generate higher average prices.
It is important to emphasize at this point that the pricing and
risk performance results are based on only five observations. This is a relatively
small sample for estimating the true risks of market advisory programs. Hence,
the results presented in this section should be viewed as exploratory rather than
Finally, the approach to performance evaluation presented in this
section opens the door to a new type of analysis. Modern Portfolio Theory (MPT)
shows how to combine market advisory programs into “portfolios” that have the
highest return for a given level of risk. A “portfolio” might consist of 50 percent
of corn and soybeans marketed by advisory program X and 50 percent marketed
by advisory program Y. MPT produces “efficient portfolios” by taking advantage
of the diversification opportunities available through combining advisory programs.
In fact, it is possible that some portfolios of advisory programs will generate
higher prices and less risk than the market benchmark (lie in the upper left quadrant
of Figures 12, 14 or 16), even though the individual
advisory programs that make up the portfolio do not. The potential improvement
in performance depends on the degree to which net advisory prices do not
tend to move together. The application of MPT to market advisory services represents
an interesting area of future research for the AgMAS Project.
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