1995 Pricing Performance of Market Advisory Services for Corn and Soybeans
L. Good, Scott H. Irwin,
Thomas E. Jackson, and Gregory K. Price*
1997 by Darrel L. Good, Scott H. Irwin, Thomas E. Jackson, and Gregory
K. Price. 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.
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 purpose of this
research report is to present an evaluation of advisory service pricing
performance in 1995 for corn and soybeans. Specifically, the average price
received by a subscriber to an advisory service is calculated for corn
and soybean crops harvested in 1995. It is important to recognize that
the performance results in this report address only the pricing, or return,
element of risk management. Another important point to consider is that
the pricing results are for one marketing period only, and it is the first
period that such results are available.
The total number
of "advisory programs" evaluated is twenty-five. The term "advisory
program" 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
Service (AgMAS) Project website .
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 and FarmDayta.
Staff members of the AgMAS Project read the information provided by each
advisory service on a daily basis.
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: 1) the marketing window for the 1995 crops is September
1, 1994 - August 31 1996, 2) cash prices and yields refer to a Central
Illinois producer, and 3) all storage is assumed to occur off-farm at
The average net advisory
price across all 25 corn programs is $3.04 per bushel. The range of net
advisory prices for corn is quite large, with a minimum of $2.34 per bushel
and a maximum of $3.81 per bushel. The average net advisory price across
all 25 soybean programs is $6.61 per bushel. As with corn, the range of
net advisory prices for soybeans is substantial, with a minimum of $5.75
per bushel and a maximum of $7.92 per bushel.
Of the 25 marketing
programs for corn, ten programs achieved a net price that is within (plus
or minus) 12 cents of the harvest cash price of $3.22 per bushel. Two
of the advisory programs achieve a net price markedly higher than the
harvest price, while 13 programs achieve a net price that is more than
12 cents per bushel below the harvest price. For soybeans, ten of the
advisory programs are grouped within (plus or minus) 20 cents per bushel
of the harvest cash price of $6.40 per bushel. However, 11 of the 25 programs
achieve a net price that is more than 20 cents per bushel above the harvest
price, with only two services more than 20 cents per bushel below the
Introduction to the
US agriculture is
entering a period of increased economic uncertainty. The recently passed
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 vast majority of producers
will have complete flexibility in their production and marketing activities.
Additional changes will be caused by the full implementation of NAFTA
and GATT and the growing world demand for agricultural products.
In this rapidly changing
environment, risk management will play 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
In addition, there is an emerging trend of producers employing private
advisory services to completely manage the commodity marketing function
of the farm business.
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.
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 of the University
of Illinois at Urbana-Champaign and Dr. Scott H. Irwin of The Ohio State
University. Correspondence with the AgMAS Project should be directed to:
Tom Jackson, AgMAS Project Manager, 345 Agricultural Administration Building,
2120 Fyffe Road, The Ohio State University, Columbus, OH 43210-1099; voice:
(614)292-4865; fax: (614)292-0078; email: firstname.lastname@example.org. The AgMAS
project also has a website that can be found at the following address:
Funding for the AgMAS
project is provided by the following organizations: American Farm Bureau
Foundation for Agriculture; Cooperative State Research, Education, and
Extension Service, US Department of Agriculture; Economic Research Service,
US Department of Agriculture; Illinois Agricultural Experiment Station;
Ohio Agricultural Research and Development Center; Ohio Soybean Council;
Ohio State University Extension; and the Risk Management Agency, US Department
Purpose of Report
The purpose of this
research report is to present an evaluation of advisory service pricing
performance in 1995 for corn and soybeans. Specifically, the average price
received by a subscriber to an advisory service is calculated for corn
and soybean crops harvested in 1995. The marketing window for the 1995
crops is September 1, 1994 - August 31, 1996. 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.
point to consider is that the pricing results are for one marketing period
only, and it is the first period that such results are available. It
is inappropriate to infer too much information from one crop year's 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' worth of results are available. The same is true for market advisory
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, 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 final section of the report presents 1995 pricing results for corn
The market advisory
services currently included in the study are those available on one of
the major electronic information services - Data Transmission Network
(DTN) or FarmDayta Network. Not all of the available "premium"
services offered on the two networks are included in the study. Only those
services judged to contain specific marketing advice for agricultural
producers are included. The total number of "advisory programs"
evaluated is twenty-five. The term "advisory program" is used
because several advisory services have more than one distinct marketing
program (Agri-Edge, Brock Associates, Pro Farmer, and Stewart-Peterson
Advisory Services each have two distinct marketing programs, and Agri-Visor
has four distinct marketing programs). A directory of the advisory services
included in the study can be found at the AgMAS website.
In order to evaluate
the returns to the marketing advice produced 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 and FarmDayta. 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."
of each advisory service are recorded separately. As noted above, some
advisory services offer two or more distinct 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.2 In this situation, both strategies
are recorded and treated as distinct strategies to be evaluated.3
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., 1995 crop), the amount of the
commodity to be sold, which futures or options contract is to be used
(where applicable), and any price targets which are mentioned (e.g., sell
cash corn when March 1996 futures reach $3.00). 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
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 service represents the best
efforts of the AgMAS Project staff to accurately and fairly interpret
the information made available by each advisory service via DTN or FarmDayta.
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 says that "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 service may differ slightly from
that stated by the advisory service, or from that recorded by another
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 service 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 they discontinue
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-world" marketing conditions.
A two-year marketing
window, spanning September 1, 1994 through August 31, 1996, is used in
the analysis. The beginning date is selected because advisory services
in the sample first began to make marketing recommendations for the 1995
crop during September 1994. 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 (25% or less) of cash corn or soybeans unsold as of August
31, 1996. In these cases, actual cash sales dates during Fall 1996 are
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. The forward contract
bid prior to September 1, 1995, was consistently 20 cents under the Chicago
Board of Trade (CBOT) December 1995 futures settlement price for corn,
and 20 cents under the CBOT November 1995 futures settlement price for
soybeans. Therefore, the price assigned to forward contract recommendations
for a particular day prior to September 1 is the CBOT December corn settlement
price or November soybean settlement price for that day minus 20 cents.
It is assumed that all forward-contracted grain is delivered at harvest.
It should be noted
that the 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 "shift" due to basis
differentials. However, it is recognized that the 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.4
Since most of the
advisory services' recommendations are given in terms of the proportion
of total production (e.g., "sell 5% of 1995 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% 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 "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- or intermediate-scale producers.
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 historical average yield, while the actual reported
yield is used from the harvest period forward.
In Central Illinois,
the average yield for corn is calculated to be 135 bushels per acre (bpa),
based upon actual yields for the previous ten years. Therefore, recommendations
regarding the marketing quantity made prior to October 1, 1995, are based
on yields of 135 bpa. For example, a recommendation to forward contract
20% of expected 1995 production translates into a recommendation to contract
27 bpa (20% of 135).
The actual reported
corn yield in Central Illinois in 1995 is 119 bpa. It is assumed that
by October 1, 1995, when 20% of the corn in Illinois had been harvested,
producers have a reasonable idea of their actual realized yield. For recommendations
made after October 1, recommendations are applied on the basis of the
actual yield of 119 bpa.
Given this change
in the yield expectation, in some cases it is necessary to make an adjustment
in the amount of the first cash sale made after October 1. For example,
if a service advises forward contracting 50% of the corn crop prior to
October 1, this translates into sales of 67.5 bpa. However, when the actual
yield is applied to the analysis, sales-to-date of 67.5 bpa imply that
56.7% 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 1995 crop, making the total recommended sales 60% of
the crop, the recommendation is adjusted to 3.3% of the actual yield (3.9
bushels), so that the total crop sold to date is 60% of 119 bushels per
acre (67.5+3.9=71.4=0.6*119). After this initial adjustment, subsequent
recommendations are taken as percentages of the 119 bpa actual yield,
so that sales of 100% of the crop equal sales of 119 bpa.
The same approach
is used for soybean evaluations. The historical ten-year average yield
for Central Illinois in 1995 is 44 bpa, while the actual yield in 1995
is 42 bpa.
While the amount
of cash sales is adjusted to reflect the change in yield information,
a similar adjustment is not made for hedges that are already in place.
For example, assume that a short futures hedge is placed in the December
1995 contract for 25% of the 1995 crop prior to October 1. Since the amount
hedged is based on the trend yield assumption of 135 bpa, the futures
position is 33.75 bpa (35% of 135). After the yield assumption is changed
on October 1, this amount represents a short hedge of 28.4% (33.75/119).
The amount of the futures position is not adjusted to move the position
back to 25% of the new yield figure due to the fact that this transaction
would incur additional brokerage fees. However, any futures positions
recommended after October 1 are implemented as a percentage of the actual
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 "leg" in or out of 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 leg of an options transaction.
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
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 across producers. Third, commercial storage cost data
are readily available, whereas this is not the case for on-farm storage.
are assigned beginning October 15, 1995, which is about the mid-point
of harvest in Illinois. Physical storage charges are assumed to be a flat
13 cents per bushel from October 15 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 average of storage charges quoted in a telephone
survey of Central Illinois elevators.
The interest rate
is assumed to be 8.6% 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 1995 and the first three
quarters of 1996 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 October 15 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) 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 1995 is $3.22 per bushel, the charge for volume reduction
is 4 cents per bushel ($3.22 * .013). Therefore, the flat shrink charge
assigned to all stored corn is 6 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.
The following is
a simple example of a complete set of marketing recommendations, and is
intended to illustrate many of the parameters previously discussed, and
how recommendations are translated into calculated returns to a market
advisory program. The recommendations provided below do not represent
the actual advice of any particular advisory program.
Corn Marketing Recommendations:
April 3, 1995 - forward
contract 25% of expected 1995 production
CBOT Dec. 95 futures
closed at $2.6475 -- less 20 cent basis adjustment, transaction price
is $2.4475. Expected yield is 135 bpa, so 33.75 (.25*135) bpa is sold.
No carrying charge is assigned to this transaction, since it will be delivered
May 15, 1995 - hedge-to-arrive
(HTA) 25% of expected 1995 production in Dec. 95 contract
CBOT Dec. 95 futures
closed at $2.625. Short hedge placed in Dec. futures at this price for
33.75 bpa. Service (brokerage) cost of 1 cent per bushel assigned to transaction.
July 20, 1995 - hedge
30% of expected 1995 production in Dec. 95 contract at $2.90
CBOT Dec. 95 futures
traded between $2.895 and $2.95 on July 20, 1995, so fill price is accepted
as given. Short hedge placed in Dec. futures at $2.90 for 40.5 bpa. Brokerage
cost of 1 cent per bushel assigned to transaction.
August 15, 1995 -
exit short Dec. hedge on 30% of 1995 production at the market
Since no specific
fill price is given, the CBOT Dec. 95 settlement price of $3.1075 is used.
Loss on position is $0.2075 per bushel. Brokerage cost is assigned when
position is taken.
November 15, 1995
- sell 25% of 1995 crop in cash market at this time
cash price for corn on this date was $3.135. Cash sales commitments now
total 75% of 1995 crop (25% F.C. + 25% HTA + 25% cash sale). Expected
yield now 119 bushels per acre, so this transaction should take total
sales to 89.25 bpa (.75*119). Previous sales totaled 67.5 bpa, so this
transaction will be for 21.75 bpa (89.25 - 67.5), instead of 25% of the
crop. Interest charge of 2 cents per bushel, storage charge of 13 cents
per bushel, and shrink charge of 6 cents per bushel assigned to this transaction.
November 30, 1995
- roll HTA to March 1996
Offset short Dec.
position on 33.75 bpa and place short position for 33.75 bpa in March
1996 futures. CBOT Dec. futures closed at $3.3075, so this futures position
lost $0.6825 ($2.625 - $3.3075) per bushel. Short March position placed
at close of $3.3775 on 33.75 bpa. Service (brokerage) cost of 1 cent per
bushel assigned to this transaction for opening new position.
February 5, 1996
- fix basis on HTA
Offset short March
position and sell grain in the cash market. CBOT March futures closed
at $3.615, so this futures position lost $0.2375 ($3.3775 - $3.615) per
bushel. The Central Illinois cash price on Feb. 5 was $3.55. Interest
charge of 9 cents per bushel, storage charge of 15 cents per bushel, and
shrink charge of 6 cents per bushel assigned to this transaction.
February 9, 1996
- protect 25% of 1995 crop with May $3.70 puts
CBOT May $3.70 puts
closed at $0.1325 per bushel. Purchased puts for 29.75 bpa (.25*119).
Brokerage cost of 0.6 cents per bushel assigned to this transaction.
April 10, 1996 -
sell final 25% of 1995 crop
cash price was $4.405 per bushel. Sale was for 29.75 bpa (.25*119). Cash
sales now total 100%, or 119 bpa (33.75+33.75+21.75+29.75). Interest charge
of 14 cents per bushel, storage charge of 20 cents per bushel, and shrink
charge of 6 cents per bushel assigned to this transaction.
April 15, 1996 -
re-own 20% of 1995 crop in July futures at $4.42
CBOT July futures
traded between $4.34 and $4.445, so fill price is accepted. Quantity assigned
is 23.8 bpa (119*0.2). Brokerage cost of 1 cent per bushel applied.
April 19, 1996 -
May $3.70 puts covering 25% of 1995 crop expired worthless
Loss on this position
was the purchase price of the puts, $0.1325 per bushel. No brokerage cost
assigned, since no transaction was made.
May 15, 1996 - Liquidate
long July futures for 20% re-ownership on the open
CBOT July futures
opened at $4.88, for a gain of $0.46 ($4.88 - $4.42) per bushel.
End of 1995 crop
Special note on
HTA's: The net price of the HTA can be viewed two different ways:
In our calculations, the net price is the cash price when the basis is
fixed ($3.55) less the futures losses ($0.6825 and 0.2375), or $2.63 per
bushel. The net price also equals the futures price when the HTA is placed
($2.625) plus the futures gain when the position is rolled ($3.3775 -
$3.3075 = $0.07), less the cash basis when the basis is fixed ($3.55 -
$3.615 = -$0.065), which also works out to $2.63 per bushel.
Recommendations into a Net Advisory Price Per Bushel
After using the assumptions
listed above to assign prices, amounts, and transaction costs to each
recommendation, the task remains to determine a single, per-bushel net
price for all of the marketing advice given for a particular crop year.
A per-bushel price (or transaction cost) is calculated by summing the
gross dollar amount of each transaction and dividing by the actual yield
for each crop.
Using the set of
recommendations given in the above example, Table
1 illustrates how the series of advisory service recommendations is
converted to a per-bushel net price received. For the cash sale recommendations,
the cash market price on the day of the sale (transaction price) is multiplied
by the amount sold to arrive at the gross revenue for the sale. When the
total cash sales for the marketing year equal 100% of the crop, the cash
sales revenues are summed and divided by 119 bpa to arrive at a weighted
average cash price, which in this example is $3.38 per bushel. A similar
approach is taken with the carrying charges. The carrying charge associated
with each post-harvest sale is multiplied by the amount of crop sold to
arrive at an average per-bushel carrying charge for the entire crop. In
this case, the average carrying charge is 22 cents per bushel.
are treated in a manner similar to cash transactions, with the transaction
price multiplied by the amount sold to produce a gross revenue for each
transaction. Sales of futures or options contracts are treated as positive
revenue, while purchases of futures and options contracts are treated
as negative revenue.5 This approach
allows calculation of a weighted average, per-bushel gain for futures
transactions. In this example, futures transactions that lost money outweighed
transactions that gained money, resulting in an average per-bushel futures
loss of 27 cents per bushel. Brokerage costs also are weighted by the
amount sold or purchased. In this example, the average per-bushel brokerage
cost is 1 cent per bushel.
The net average price
received is the average cash price ($3.38) less the carrying charge ($0.22)
plus the futures gain ($-0.27) less the brokerage cost ($0.01), which
produces a net price of $2.87 per bushel.
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 how a producer fares using some basic
marketing strategies that do not require professional marketing advice.
Average Harvest-Period Price: The most obvious example of a simple marketing
strategy a farmer could implement without purchasing marketing advice is to sell
the crop immediately at harvest. For corn, the average harvest-period cash price
is calculated as the simple average of the Central Illinois cash price between
October 15 and November 15 for corn, and between October 1 and October 31 for
soybeans. The average harvest-period cash price in the 1995/96 marketing year
for corn is $3.22 per bushel, and for soybeans is $6.40 per bushel.
Average Price Received: Another useful benchmark is the average price
received by farmers. In this study, the approach taken to calculating this price
is similar to that used by the USDA in estimating the average price received by
US farmers. The benchmark price is calculated as a weighted average of the price
received by farmers in the state of Illinois between September 1995 and August
1996, as reported by USDA in its Agricultural Prices publication. In order
to make this benchmark price consistent with the methodology for calculating the
average returns to marketing advice, the monthly average cash market prices from
November 1995 through August 1996 are adjusted back to a harvest-period equivalent
by deducting carrying costs at mid-month. These monthly prices are then weighted
by the average amount of the crop marketed in each month by Illinois farmers,
also reported in USDA's Agricultural Prices. The average price received
by Illinois farmers in the 1995/96 marketing year (after adjusting for carrying
charges) is $3.17 per bushel for corn, and is $6.64 per bushel for soybeans.
1995 Pricing Performance
Results for the Advisory Services
for the 25 advisory programs for the 1995 corn and soybean crops are presented
in Tables 2 through 4 and Figures
1a through 4b.
results of the evaluation of corn marketing programs are contained in
Table 2. 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 25 programs is $3.04 per
bushel, 18 cents below the harvest cash price and 13 cents below the average
price received. The range of net advisory prices for corn is quite large,
with a minimum of $2.34 per bushel and a maximum of $3.81 per bushel.
3 lists the program-by-program results of the soybean evaluations.
The average net advisory price for all 25 programs is $6.61 per bushel,
21 cents per bushel above the harvest cash price and three cents per bushel
below the average price received. As with corn, the range of net advisory
prices for soybeans is substantial, with a minimum of $5.75 per bushel
and a maximum of $7.92 per bushel.
A point to consider
when examining Tables 2 and 3 is the impact
of the assumption that all storage occurs off-farm. It is possible to
argue that, in the short run, marginal cost of on-farm storage of grain
is zero if the facilities already exist, are already paid for, etc. Applying
this logic, the results change only somewhat. Excluding the costs of commercial
storage entirely (but continuing to subtract interest costs), the average
net advisory price for corn increases to $3.17 per bushel, still less
than the harvest cash price of $3.22 per bushel but equal to the average
price received. The net advisory price for soybeans increases to $6.73
per bushel, above both benchmark soybean prices.
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 revenues are 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 1995. These revenues are compared
with the revenue a Central Illinois producer could have received by selling
all corn and soybeans at harvest in the local cash market or selling corn
and soybeans at the average price received by Illinois producers. Both
benchmark revenues are adjusted for carrying costs.
4 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 $319,908, about $6,000
less than the revenue that could have been achieved if the producer sold
all grain in the cash market at harvest. The average revenue is about
$8,000 below the revenue that would have been received if the producer
received the average price received by all Illinois producers for the
1995 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 $120,000.
For comparison purposes,
the annual subscription cost of each advisory program also is listed in
Table 4. Subscription costs, which average
$271 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 the Table 4.
of the net advisory prices is illustrated in Figure
1. Of the 25 marketing programs for corn, ten programs achieved a
net price that is within (plus or minus) 12 cents of the harvest cash
price of $3.22 per bushel. Two of the advisory programs achieve a net
price markedly higher than the harvest price, while 13 programs achieve
a net price that is more than 12 cents per bushel below the harvest price.
For soybeans, ten of the advisory programs are grouped within (plus or
minus) 20 cents per bushel of the harvest cash price of $6.40 per bushel.
However, 11 of the 25 programs achieve a net price that is more than 20
cents per bushel above the harvest price, with only two services more
than 20 cents per bushel below the harvest price. In terms of revenue,
14 of the 25 programs achieved total revenues within (plus or minus) $14,000
of the harvest cash revenue. Two programs achieved a total revenue well
above the harvest cash revenue. In total, nine of the 25 services achieved
total revenues that are below the harvest cash revenue by more than $14,000.
A different view
of the pricing performance of the advisory programs is shown in Figure
2, Figure 3 and Figure
4. Here, net advisory prices or revenues are rank ordered from 1 to
25 and plotted versus benchmark prices. As shown in Figure
2a, only four marketing programs achieve a net price for corn that
is equal to or higher than the cash price at harvest. Figure
2b shows that seven programs achieve a net price equal to or higher
than the average price received by Illinois farmers for the 1995 marketing
period. As reported in Figures 3a and 3b,
nineteen of the twenty-five soybean programs achieve a net advisory price
equal to or higher than the harvest cash price, while eleven soybean programs
equal or top the average price received.
In looking at the
results, it is worth noting that the 1995 marketing period was quite unusual,
particularly for corn. A combination of weather-induced production problems
in the U.S., low world stocks of feed grains, and strong world demand
for grains caused prices to rise steadily prior to the 1995 harvest. Prices
then skyrocketed after harvest as it became clear that domestic and export
demand were more than could be met with existing supplies.
5 illustrates how unusual the 1995/96 marketing year is from a price
perspective.6 For the ten marketing
years prior to 1995/96, the mean of the season-average prices received
by Illinois farmers is $2.25 per bushel for corn and $5.86 per bushel
for soybeans. The maximum price received for this time frame is $2.59
per bushel for corn and $7.45 per bushel for soybeans, both observed in
1988/89. The season-average price for 1995/96 is estimated to be $3.45
per bushel for corn and $6.95 per bushel for soybeans.
6 shows the pattern of prices available for the 1995/96 corn and soybean
crops. In January 1995, forward cash bids for the 1995 corn crop were
around the ten-year average price of $2.25. By May 1995, prices moved
up to the vicinity of the 1988 season average price of $2.59. At that
time, prices looked fairly attractive for forward contracting. For soybeans,
bids began 1995 at 20 cents below the 10-year historical marketing year
average price, and did not reach the 1988 high of $7.45 until January
1996, when that level was touched for one day, and did not break out above
the $7.45 level until April 1996.
The fact that prices
tended to steadily rise through the marketing year meant that a traditional
marketing program which sold some or all of a producer's corn prior to
harvest did not capture the rise in prices witnessed after harvest. Also,
programs that utilized the traditional strategy of short futures hedges
prior to harvest tended to show substantial losses in futures trading.
Marketing programs that recommended producers assume more downward price
risk through storing cash grain and/or holding long futures positions,
or managed the downside risk through the purchase of put options, were
better positioned to take advantage of the price increases later in the
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
L. Good is a Professor in the Department of Agricultural and Consumer
Economics at the University of Illinois at Urbana-Champaign. Scott H.
Irwin is the Francis B. McCormick Professor of Agricultural Marketing
and Policy in the Department of Agricultural Economics at The Ohio State
University. Thomas E. Jackson is the AgMAS Project Manager in the Department
of Agricultural Economics at The Ohio State University. Gregory K. Price
currently is a Graduate Research Assistant in the Department of Agricultural
Economics at Purdue University. Previously, he was the AgMAS Project Manager
in the Department of Agricultural and Consumer Economics at the University
of Illinois at Urbana-Champaign. The authors gratefully acknowledge the
research assistance of Roberto Bertoli, Jim Flinn, Tom Hollinger, Joao
Martines-Filho, and Janelle Smith. Valuable comments were received from
Allan Lines, Gary Schnitkey, Carl Zulauf, and members of the AgMAS Project
Patrick, G.F. and S. Ullerich. "Information Sources and Risk Attitudes
of Large Scale Farmers, Farm Managers, and Agricultural Bankers."
Some of the programs that are depicted as "cash-only" did in
fact have some futures activity, due to the use of hedge-to-arrive contracts
and some use of options.
There are two instances where a service clearly differentiates strategies
based on the availability of on-farm versus off-farm (commercial) storage.
In these two instances, recorded recommendations reflect the off-farm
storage strategy. Otherwise, services do not differentiate strategies
according to the availability of on-farm storage.
Liquidity costs reflect the fact that non-floor traders must buy at the
ask price and sell at the bid price. The difference between the bid and
ask prices, termed the bid-ask spread, is the return earned by floor traders
for "making the market."
This procedure does not account for the interest earnings or costs associated
with a futures margin account.
Note that the season average prices presented in Figure
5 are not adjusted for carrying costs.
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