Report 1998-01: 1996 Pricing Performance of Market Advisory Services for
Corn and Soybeans
Thomas E. Jackson, Scott H. Irwin,
and Darrel L. Good*
Copyright 1998 by Thomas E. Jackson,
Scott H. Irwin, and Darrel L. Good. All rights reserved. Readers may make verbatim
copies of this document for non-commercial purposes by any means, provided that
this copyright notice appears on all such copies.
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 purpose of this research report is to present an evaluation of advisory
service pricing performance in 1996 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 1996. It is important to recognize that the performance
results in this report address only the pricing, or return, element of risk management.
The total number of "advisory programs" evaluated is 26 for corn,
and 24 for soybeans. 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
Project website (http://www.farmdoc.uiuc.edu/agmas/index.html).
In order to evaluate the returns to the marketing advice produced by the services,
the AgMAS Project purchases a subscription to each of the services included in
the study. The information is received electronically via DTN. Staff members of
the AgMAS Project read the information provided by each advisory service on a
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: 1) the marketing window for the 1996 crops is September 1, 1995
- August 31 1997, 2) cash prices and yields refer to a Central Illinois producer,
and 3) all storage is assumed to occur off-farm at commercial sites.
The average net advisory price across all 26 corn programs is $2.63 per bushel.
The range of net advisory prices for corn is quite large, with a minimum of $2.08
per bushel and a maximum of $3.12 per bushel. The average net advisory price across
all 24 soybean programs is $7.27 per bushel. As with corn, the range of net advisory
prices for soybeans is substantial, with a minimum of $6.80 per bushel and a maximum
of $7.80 per bushel.
Of the marketing programs for corn, five achieve a net price that is within
(plus or minus) 10 cents of the harvest cash price of $2.81 per bushel. Two of
the advisory programs achieve a net price more than 10 cents higher than the harvest
price, while 19 programs achieve a net price that is more than 10 cents per bushel
below the harvest price. For soybeans, only one of the advisory programs is within
(plus or minus) 10 cents per bushel of the harvest cash price of $6.95 per bushel.
However, 21 of the 24 programs achieve a net price that is more than 10 cents
per bushel above the harvest price, with only two services more than 10 cents
per bushel below the harvest price.
Introduction to the AgMAS Project
US agriculture has entered a period of increased economic uncertainty. The
1996 Federal Agricultural Improvement and Reform Act (FAIR) represents
an especially profound change in the operating environment of agriculture. For
the first time in over sixty years, the majority of producers have complete flexibility
in their crop production and marketing activities. Additional changes will be
caused by the full implementation of NAFTA and GATT and the growing world demand
for agricultural products.
In this rapidly changing environment, risk management plays a more important
role in the overall management of farm businesses. The use of private-sector advisory
services to secure marketing and price risk management advice is expected to increase
as producers respond to the rising demand for risk management strategies. Market
advisory services already are quite popular with many producers. Surveys indicate
Patrick and Ullerich).1
Despite their expected importance in the future and current popularity, surprisingly
little is known about the risk management strategies recommended by these services
and their associated performance. There is a clear need to develop an ongoing
"track record' of the performance of these services. Information on the performance
of advisory services will assist producers in identifying successful alternatives
for marketing and price risk management.
The Agricultural Market
(AgMAS) Project, initiated in the Fall of 1994, addresses
the need for information on advisory services. The project is jointly directed
by Dr. Darrel L. Good and Dr. Scott H. Irwin of the University of Illinois at
Urbana-Champaign. Correspondence with the AgMAS Project should be directed to:
Joao Martines-Filho, AgMAS Project Manager, 406 Mumford Hall, 1301 West Gregory Drive,
University of Illinois at Urbana-Champaign, Urbana, IL 61801; voice: (217)333-2792;
fax: (217)333-5538; email: email@example.com.
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; Ohio Soybean Council; and the Risk Management Agency,
US Department of Agriculture.
Purpose of Report
The primary purpose of this research report is to present an evaluation of
advisory service pricing performance in 1996 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 1996. The marketing window for the 1996
crops is September 1, 1995 - August 31, 1997. Another purpose of this report is
to compare the pricing performance results for the 1996 corn and soybean crops
with previously released results for the 1995 crop year.
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
Another important point to consider is that the pricing results are available
for only two marketing periods. It is inappropriate to infer too much information
from two crop years' results. A useful analogy is university yield trials
for crop seed. In evaluating the results of crop yield trials, while the results
of the most recent year may be of particular interest, firm conclusions about
the relative merits of one type of seed versus another can only be drawn after
several years of results are available. The same is true for market advisory services.
This report has been reviewed by the AgMAS Review Panel, which provides independent,
peer-review of AgMAS Project research. The members of this panel are: Henry Bahn,
National Program Leader with the Cooperative State Research, Education, and Extension
Service, US Department of Agriculture; Frank Buerskens, independent agribusiness
consultant in Bloomington, Illinois; Renny Ehler, farmer in Champaign County,
Illinois; Chris Hurt, Professor in the Department of Agricultural Economics at
Purdue University; Terry Kastens, Assistant Professor in the Department of Agricultural
Economics at Kansas State University and farmer in Rawlins County, Kansas; and
Robert Wisner, University Professor in the Department of Economics at Iowa State
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 1996 pricing results for corn and soybeans.
The final section presents a summary of the combined results for both the 1995
and 1996 crop years.
The market advisory services currently included in the study are those available
from Data Transmission Network (DTN), via their Ag Daily, DTNstant, and/or DTN
FarmDayta services. Not all of the available "premium" services offered
by DTN are included in the study. Only those services judged to contain specific
marketing advice for agricultural producers are included. The total number of
"advisory programs" evaluated for the 1996/97 crop marketing year is
26 for corn and 24 for soybeans, compared with 25 programs each for corn and soybeans
in 1995, the first year for which results were calculated.2
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. Allendale and Ag
Line by Doane both provide two distinct programs for corn but only one for soybeans.
A directory of the advisory services included in the study can be found at the
In order to evaluate the returns to the marketing advice provided by the services,
the first step is to collect the daily recommendations of the services. The AgMAS
Project purchases a subscription to each of the services included in this study,
and the information is received via DTN. Staff members of the AgMAS Project read
the information provided by each advisory service on a daily basis. For the services
that provide two daily updates, typically in the morning and at noon, information
is read in the morning and afternoon. In this way, the actions of a producer-subscriber
are simulated in "real-time."
The recommendations 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.3
In this situation, both strategies are recorded and treated as distinct strategies
to be evaluated.4
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 years crop is being sold, (e.g., 1996 crop), the amount
of the commodity to be sold, which futures or options contract is to be used (where
applicable), and any price targets that are mentioned (e.g., sell cash corn when
March 1997 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 is canceled.
Several procedures are used to check the recorded recommendations for accuracy
and completeness. Whenever possible, recorded recommendations are cross-checked
against later status reports provided by the relevant advisory service. Also,
at the completion of the marketing period, it is confirmed whether cash sales
total exactly 100%, all futures positions are offset, and all options positions
are offset or expire worthless.
The final set of recommendations attributed to each advisory program represents
the best efforts of the AgMAS Project staff to accurately and fairly interpret
the information made available by each advisory service via DTN. In cases where
a recommendation is considered vague or unclear, some judgment is exercised as
to whether or not to include that particular recommendation. This occurs most
often when a service suggests "a producer might 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
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 advisory program when cumulative cash sales of the commodity
reach 100%, all open futures positions covering the crop are offset, all open
option positions covering the crop are either offset or expired, and the advisory
program discontinues giving advice for that crop year, such as re-ownership via
futures or call options. The returns to each recommendation are then calculated
in order to arrive at a weighted average net price that would be received by a
producer who precisely follows the marketing advice (as recorded by the AgMAS
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, 1995 through August 31,
1997, is used in the analysis. The beginning date is selected because advisory
services in the sample first began to make marketing recommendations for the 1996
crop during September 1995. The ending date is selected to be consistent with
the ending date for corn and soybean marketing years as defined by the US Department
of Agriculture (USDA). There are a few exceptions to the marketing window definition.
Three advisory programs had relatively small amounts (10% or less) of cash corn
or soybeans unsold as of August 31, 1997. One marketing program also began pre-harvest
hedges prior to September 1, 1995. In these cases, the actual sales recommendations
The cash price assigned to each cash sale recommendation is the Central Illinois
closing, or overnight, bid. The Central Illinois price is the mid-point of the
range of bids by elevators in a 25-county area in central and east central Illinois.
The bids are collected and reported by the Illinois Department of Agriculture.
The Central Illinois market also is used for forward contract transactions.
Cash forward bids reported by the Illinois Department of Ag. Market News are recorded
only for each Thursday. For the purposes of this study, we assume that the cash-forward
basis with respect to the Chicago Board of Trade (CBOT) December 1996 futures
settlement price for corn, and the CBOT November 1996 futures settlement price
for soybeans remains the same until the next Thursday. Therefore, the price assigned
to forward contract recommendations for a particular day prior to October 1 is
the CBOT December corn settlement price or November soybean settlement price for
that day minus the reported basis for that day or the previous Thursday. It is
assumed that all forward-contracted grain is delivered at harvest.
It should be noted that the relative results of the analysis are likely to
be similar if another location is used. The calculated returns to all the trading
programs (as well as the benchmark prices) would most likely "shift"
due to basis differentials. However, 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.5
Since most of the advisory program recommendations are given in terms of the
proportion of total production (e.g., "sell 5% of 1996 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 who are less able to sell in 5,000 bushel increments.
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 years expected
yield is a function of yield in previous years. In this study, the assumed yield
prior to harvest is the calculated trend yield, while the actual reported yield
is used from the harvest period forward.
In Central Illinois, the expected yield for corn is calculated to be 138 bushels
per acre (bpa). Therefore, recommendations regarding the marketing quantity made
prior to October 1, 1996, are based on yields of 138 bpa. For example, a recommendation
to forward contract 20% of expected 1996 production translates into a recommendation
to contract 27.6 bpa (20% of 138). The actual reported corn yield in Central Illinois
in 1996 is 155 bpa. The same approach is used for soybean evaluations. The calculated
trend yield for Central Illinois in 1996 is 46 bpa, while the actual yield in
1996 is 45.5 bpa.
The expected yield is based upon a linear regression trend model of actual
yields from 1972 through 1995 for Central Illinois. The calculation of the pre-harvest
expected yield in this report differs from the calculation used for the 1995 pricing
results (AgMAS Publication 1997-01). In the previous report, a simple average
of the yields for the previous 10 years was used. Previous research suggests a
regression trend model produces more accurate yield forecasts.6
In addition to using the trend yield estimates to calculate the net advisory prices
for the 1996 crop year, the 1995 pricing results also were re-calculated using
the regression model trend yield. For 1995, the regression trend yield is calculated
to be 140 bpa for corn and 46 bpa for soybeans.
It is assumed that by October 1, 1996, when approximately 10% of the corn in
Illinois had been harvested, producers had 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 155 bpa. The expected soybean yield also is changed
on October 1.
The issue of changing yield expectations typically is not dealt with in the
recommendations of the advisory programs. For the purpose of this study, the actual
harvested yield must exactly equal total cash sales of the crop at the end of
the marketing time frame. Hence, an adjustment in yield assumptions from expected
to actual levels must be applied to cash transactions at some point in time. In
this analysis, an adjustment is made in the amount of the first cash sale made
after October 1. For example, if a service advises forward contracting 50% of
the corn crop prior to October 1, this translates into sales of 69 bpa. However,
when the actual yield is applied to the analysis, sales-to-date of 69 bpa imply
that 44.5% of the crop has already been contracted. In order to compensate for
this, the amount of the next cash sale is adjusted to align the amount sold. In
this example, if the next cash sale recommendation is for a 10% increment of the
1996 crop, making the total recommended sales 60% of the crop, the recommendation
is adjusted to 15.5% of the actual yield (24 bushels), so that the total crop
sold to date is 60% of 155 bushels per acre (69+24=93=0.6*155). After this initial
adjustment, subsequent recommendations are taken as percentages of the 155 bpa
actual yield, so that sales of 100% of the crop equal sales of 155 bpa.
While the amount of cash sales is adjusted to reflect the change in yield information,
a similar adjustment is not necessary for futures or options positions that are
already in place. For example, assume that a short futures hedge is placed in
the December 1996 contract for 25% of the 1996 crop prior to October 1. Since
the amount hedged is based on the trend yield assumption of 138 bpa, the futures
position is 34.5 bpa (25% of 138). After the yield assumption is changed on October
1, this amount represents a short hedge of 22.3% (34.5/155). The amount of the
futures position is not adjusted to move the position to 25% of the new yield
figure. However, any futures positions recommended after October 1 are implemented
as a percentage of the actual yield.
Brokerage costs are incurred when producers open or lift positions in futures
and options markets. For the purposes of this study, it is assumed that brokerage
costs are $50 per contract for a round-turn for futures transactions, and $30
per contract to enter or exit an options position. Further, it is assumed that
CBOT corn and soybean futures are used, and the contract size for each commodity
is 5,000 bushels. Therefore, per-bushel brokerage costs are 1 cent per bushel
for a round-turn futures transaction and 0.6 cents per bushel for each options
An important element in assessing returns to an advisory program is the economic
cost associated with storing grain instead of selling grain immediately at harvest.
The cost of storing grain after harvest (carrying costs) consists of two components:
physical storage charges and the opportunity cost incurred by foregoing sales
when the crop is harvested. Physical storage charges can apply to off-farm (commercial)
storage, on-farm storage, or some combination of the two. Opportunity cost is
the same regardless of the type of physical storage.
For the purposes of this study, it is assumed that all storage occurs off-farm
at commercial sites. This is assumed for several reasons. First, commercial storage
costs reflect the full economic costs of physical storage, whereas on-farm storage
cost estimates may not, due to differing accounting methods and/or time horizons.
Second, commercial storage costs are relatively consistent across producers in
a given area, whereas on-farm storage costs likely vary substantially among producers.
Third, commercial storage cost data are readily available, whereas this is not
the case for on-farm storage.
Carrying charges are assigned beginning October 15, 1996, which is about the
mid-point of both corn and soybean 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 typical storage charges quoted in a telephone
survey of Central Illinois elevators.
The interest rate is assumed to be 9.125% 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 1996 and the first three
quarters of 1997 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
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 1996 is $2.81 per bushel,
the charge for volume reduction is 3.7 cents per bushel ($2.81 * .013). Therefore,
the flat shrink charge assigned to all stored corn is 5.7 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.
Hypothetical 1996/97 Corn Marketing Recommendations:
April 3, 1996 forward contract (F/C) 25% of expected 1996 production
CBOT Dec. 96 futures closed at $3.2875 -- less 16 cent basis adjustment, transaction
price is $3.1275. Expected yield is 138 bpa, so 34.5 (.25*138) bpa is sold. No
carrying charge is assigned to this transaction, since it will be delivered at
May 15, 1996 - hedge-to-arrive (HTA) 25% of expected 1996 production in Dec.
CBOT Dec. 96 futures closed at $3.5825. Short hedge placed in Dec. futures
at this price for 34.5 bpa. Service (brokerage) cost of 1 cent per bushel assigned
August 1, 1996 - hedge 30% of expected 1996 production in Dec. 96 contract
CBOT Dec. 96 futures traded between $3.235 and $3.29 on August 1, 1996, so
fill price is accepted as given. Short hedge placed in Dec. futures at $3.25 for
41.4 bpa. Brokerage cost of 1 cent per bushel assigned to transaction.
August 15, 1996 - exit short Dec. hedge on 30% of 1996 production at the market
Since no specific fill price is given, the CBOT Dec. 96 settlement price of
$3.4925 is used. Loss on position is $0.2425 per bushel. Brokerage cost was assigned
when position is taken.
November 15, 1996 - sell 25% of 1996 crop in cash market at this time
Central Illinois cash price for corn on this date was $2.65. Cash sales commitments
now total 75% of 1996 crop (25% F/C + 25% HTA + 25% cash sale). Expected yield
now 155 bushels per acre, so this transaction should take total sales to 116.25
bpa (.75*155). Previous sales totaled 69 bpa, so this transaction will be for
47.25 bpa (116.25 - 69), instead of 25% of the crop. Interest charge of 2 cents
per bushel, storage charge of 13 cents per bushel, and shrink charge of 5.7 cents
per bushel assigned to this transaction.
November 27, 1996 - roll HTA to March 1997
Offset short Dec. position on 34.5 bpa and place short position for 33.75
bpa in March 1997 futures. CBOT Dec. futures closed at $2.72, so this futures
position gained $0.8625 ($3.5825 - $2.72) per bushel. Short March position placed
at close of $2.735 on 33.75 bpa. Service (brokerage) cost of 1 cent per bushel
assigned to this transaction for opening new position.
February 5, 1997 - fix basis on HTA
Offset short March position and sell grain in the cash market. CBOT March
futures closed at $2.725, so this futures position gained $0.01 ($2.735 - $2.725)
per bushel. The Central Illinois cash price on Feb. 5 was $2.64. Interest charge
of 8 cents per bushel, storage charge of 15 cents per bushel, and shrink charge
of 5.7 cents per bushel assigned to this transaction.
February 10, 1997 - protect 25% of 1996 crop with May $2.70 puts
CBOT May $2.70 puts closed at $0.0675 per bushel. Purchased puts for 38.75
bpa (.25*155). Brokerage cost of 0.6 cents per bushel assigned to this transaction.
April 10, 1997 - sell final 25% of 1996 crop
Central Illinois cash price was $2.90 per bushel. Sale was for 38.75 bpa (.25*155).
Cash sales now total 100%, or 155 bpa (34.5+34.5+47.25+38.75). Interest charge
of 12 cents per bushel, storage charge of 20 cents per bushel, and shrink charge
of 5.7 cents per bushel assigned to this transaction.
April 15, 1997 - re-own 20% of 1996 crop in July futures at $3.02
CBOT July futures traded between $3.00 and $3.045, so fill price is accepted.
Quantity assigned is 31 bpa (155*0.2). Brokerage cost of 1 cent per bushel applied.
April 18, 1997 - May $2.70 puts covering 25% of 1996 crop expired worthless
Loss on this position was the purchase price of the puts, $0.0675 per bushel.
No brokerage cost assigned, since no transaction was made.
May 15, 1997 - Liquidate long July futures for 20% re-ownership on the open
CBOT July futures opened at $2.83, for a loss of $0.19 ($2.83 - $3.02) per
End of 1996 crop recommendations.
Special note on HTAs: 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 ($2.64) plus the futures gains ($0.8625 and 0.01), or $3.5125 per
bushel. The net price also equals the futures price when the HTA is placed ($3.5825)
plus the futures gain when the position is rolled ($2.735 - $2.72 = $0.015), less
the cash basis when the basis is fixed ($2.64 - $2.725 = -$0.085), which also
works out to $3.5125 per bushel.
Translating 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 a series of advisory program 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 155 bpa to arrive at a weighted average cash price, which in this
example is $2.82 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.
Futures transactions 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.7 This approach allows calculation
of a weighted average, per-bushel gain for futures transactions. In this example,
futures/options transactions that gained money outweighed transactions that lost
money, resulting in an average per-bushel futures/options gain of 8 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 ($2.82) less the carrying
charge ($0.22) plus the futures gain ($0.08) less the brokerage cost ($0.01),
which produces a net price of $2.67 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. The average harvest-period cash price is calculated
as the simple average of the Central Illinois cash price between October 1 and
October 31 for corn and soybeans. The average harvest-period cash price in the
1996/97 marketing year for corn is $2.81 per bushel, and for soybeans is $6.95
Note that the method for calculating the harvest-period cash price for corn
has been changed for this report when compared with the report of the 1995 crop
year pricing results. In the previous report, the period between October 15 and
November 15 had been used for the corn harvest price. Upon reviewing corn harvest
progress data for Central Illinois, using the month of October was deemed to more
accurately depict the harvest time frame.
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 1996 and August
1997, as reported by USDA in its Agricultural Prices publication. It is
worth noting that this price series represents an average price for the entire
state of Illinois, while the harvest cash price and the net advisory price are
based on Central Illinois cash grain bids. No comparable series of average price
received is available for the Central Illinois region only. However, analysis
of daily prices reported by the Illinois Grain and Livestock Market News indicates
that the Central Illinois cash price is very close to the state average price.
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 1996 through August 1997 are adjusted back to a harvest-period equivalent
by deducting storage and interest costs at mid-month. Based upon conversations
with the Illinois Agricultural Statistics Service, it was determined that shrink
charges already are deducted from the reported average corn price received, so
the shrink charge is not deducted again. The September and October 1996 monthly
average prices do not need to be adjusted for storage and interest charges. These
monthly prices are then weighted by the average percentage of the crop marketed
in each month by Illinois farmers, also reported in USDAs Agricultural
Prices. The average price received by Illinois farmers in the 1996/97 marketing
year (after adjusting for carrying charges) is $2.55 per bushel for corn, and
is $7.18 per bushel for soybeans.
1996 Pricing Performance Results for the Advisory Services
Evaluation results for the advisory programs for the 1996 corn and soybean
crops are presented in Tables 2 through 4 and Figures 1 through 4.
The program-by-program 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 26 programs is $2.63 per bushel,
18 cents below the harvest cash price and six cents above the average price received.
The range of net advisory prices for corn is quite large, with a minimum of $2.08
per bushel and a maximum of $3.12 per bushel
Table 3 lists the program-by-program results
of the soybean evaluations. The average net advisory price for all 24 programs
is $7.27 per bushel, 32 cents per bushel above the harvest cash price and nine
cents per bushel above the average price received. As with corn, the range of
net advisory prices for soybeans is substantial, with a minimum of $6.80 per bushel
and a maximum of $7.80 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
and variable costs associated with handling grain and maintaining grain quality
are not included. Applying this logic, the results change somewhat. Excluding
the costs of commercial storage entirely (but continuing to subtract interest
costs), the average net advisory price for corn increases to $2.76 per bushel,
five cents below the harvest cash price of $2.81 per bushel. The net advisory
price for soybeans increases to $7.38 per bushel, well above the harvest cash
price of $6.95 per bushel. The calculation of the average price received by farmers
also would be impacted by the change in the storage cost assumption. If only interest
costs are subtracted from the monthly average prices received, the season-average
price received for corn (soybeans) becomes $2.70 ($7.33) per bushel. Therefore,
if storage charges are assumed to be zero, the net advisory price for corn is
six cents above the average price received, and for soybeans the net advisory
price is five cents above the average price received.
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 1996. 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 on a harvest-period equivalent
basis. Total advisory revenue is calculated only for those programs which offer
both corn and soybean marketing advice.
Table 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
$368,553, which is $7,335 lower than the revenue that could have been achieved
if the producer sold all grain in the cash market at harvest. The average revenue
is $7,583 above the revenue that would have been received if the producer received
the average price received by all Illinois producers for the 1996 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
For comparison purposes, the annual subscription cost of each advisory program
also is listed in Table 4. Subscription costs, which average $287 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.
The distribution of the net advisory prices is illustrated in Figure
1. Of the 26 marketing programs for corn, five programs achieved a net price
that is within (plus or minus) 10 cents of the harvest cash price of $2.81 per
bushel. Two of the advisory programs achieve a net price more than $2.92 per bushel
(11 cents higher than the harvest price). Almost half of the programs are grouped
in a range between 11 and 31 cents below the harvest cash price, with five programs
between 32 and 52 cents below the harvest cash price. Two programs achieve a net
price that is more than 53 cents per bushel below the harvest price. For soybeans,
only one of the advisory programs is within (plus or minus) 10 cents per bushel
of the harvest cash price of $6.40 per bushel, and only two other services fall
below this range. On the other hand, 11 of the 24 programs achieve a net price
that is between 42 and 62 cents per bushel above the harvest price, with three
additional services above this range ($7.48 per bushel or more). In terms of revenue,
15 of the 24 programs achieve total revenues within (plus or minus) $10,000 of
the harvest cash revenue. Two programs achieve a total revenue that is $11,000
or more above the harvest cash revenue, with four programs between $11,000 and
31,000 below the harvest cash revenue, and three other programs below the harvest
cash revenue by $32,000 or more.
A different view of the pricing performance of the advisory programs is shown
in Figures 2 through 4. Here, net advisory prices or revenues are ranked from
highest to lowest and plotted versus the benchmarks. As shown in Figure
2, four marketing programs achieve a net price for corn that is equal to or
higher than the cash price at harvest, while 18 programs achieve a net price equal
to or higher than the average price received by Illinois farmers for the 1996
marketing period. This illustrates the high frequency of observations right around
the benchmark prices. As reported in Figure 3, 22
of the 24 soybean programs achieve a net advisory price equal to or higher than
the harvest cash price, while 16 soybean programs equal or top the average price
received. Figure 4 shows the comparison between
the total advisory revenue and the total revenue implied by each of the benchmark
prices. Total advisory revenue was greater than the total revenue that would have
been realized by a producer who sold at harvest for six of the marketing programs.
Total advisory revenue for 17 of the marketing programs was greater than the revenue
that would have been realized if the producer had sold corn and soybeans for the
average price received by Illinois farmers.
Figure 5 illustrates how the 1996/97 marketing
year compares with previous years from a price perspective.8
For the ten marketing years prior to 1996/97, the mean of the season-average prices
received by Illinois farmers is $2.37 per bushel for corn and $6.04 per bushel
for soybeans. The maximum price received for this time frame is $3.45 per bushel
for corn (observed in 1995/96) and $7.45 per bushel for soybeans, (observed in
1988/89). The season-average price for 1996/97 is estimated to be $2.79 per bushel
for corn and $7.55 per bushel for soybeans.
Figure 6 shows the pattern of prices available
for the 1996/97 corn and soybean crops. From January through March 1996, forward
cash bids for the 1996 corn crop gradually increased from $2.65 to $3.00. After
that, prices stayed above $3.00 through late September, peaking at $3.65 per bushel
in mid-July 1996. At that time, prices were at historically high levels, due to
record-low old-crop (1995 crop) supplies. However, prices declined rapidly once
harvest commenced and new supplies became available. By early November 1996 prices
had dropped to around $2.50 per bushel. Prices rose to near $3.00 during March
1997, but then declined again, reaching a low of around $2.30 in early July 1997.
For soybeans, forward cash bids began 1996 in a range between $6.70 and $7.20
from January through March 1996, then ranged between $7.10 and $7.70 from April
through June 1996. Cash-forward prices became highly variable from July 1996 through
the beginning of harvest, ranging from $7.00 to around $7.90. As with corn, prices
declined rapidly as harvest commenced, reaching a low of $6.61 at the end of October
1996. Prices then rose gradually for about three months, until projections of
record-low soybean stocks caused prices to move up rapidly to a high of almost
$9.00 in early May 1997. Prices then backed off gradually through the end of the
marketing year as it became clear that soybean plantings for the next (1997) crop
had reached very high levels, which reduced supply concerns.
Figure 7 offers a slightly different perspective
on prices for the 1996/97 corn and soybean crops. Storage, interest, and (in the
case of corn) shrink charges are subtracted from the post-harvest cash prices
to show the pattern of harvest-equivalent prices available through the marketing
year. The corn price chart shows that the cash market did not offer much of a
return above storage costs at any time after the 1996 harvest; in fact, by late
June of 1997 the harvest-equivalent corn price was below $2.00 per bushel. In
contrast, the cash soybean market offered positive returns to storage relative
to the price at harvest for much of the post-harvest period.
The fact that cash corn bids for the 1996 crop were the highest in the pre-harvest
period, and declined rapidly after harvest, meant that a traditional marketing
program which sold some or all of a producers corn prior to harvest achieved
a relatively high price for the crop when compared with programs which held the
crop in storage. Also, programs that utilized the traditional strategy of short
futures hedges prior to harvest tended to show substantial gains in futures trading.
Marketing programs that recommended producers assume more downward price risk
through storing cash grain not only obtained a lower cash price but also incurred
storage and interest costs. For soybeans, some substantial returns to storage
were available for sales during much of 1997.
Again, it is important to recognize that the performance results are based
on pricing, or return, performance only. While certainly useful, these results
do not address the issue of risk. Two programs with the same net advisory price
may expose producers to quite different risks through the marketing period. Research
is currently underway at the AgMAS project to quantify the risk profiles of the
different programs. A comparison of return and risk will allow a more complete
picture of the performance of agricultural market advisory services.
Two-year Average Pricing Performance Results
A summary of the results of the pricing performance evaluations for both the
1995 and 1996 corn and soybean marketing years is contained in Tables 5 through
7 and Figures 8 through 11. Some of the marketing programs included in the table
were only evaluated for either 1995 or 1996. The two-year averages are calculated
only for the 22 marketing programs that were evaluated for both years.
The 1995 pricing results are similar to results that were previously reported
in AgMAS Research Report 1997-01, published in March 1997. However, the numbers
have been changed to reflect the change in the calculation of the trend yield
for both corn and soybeans. In the previous report, the historical yield for the
1995 crop was calculated as 135 bpa for corn and 44 bpa for soybeans. The 1995
pricing results that are reported in Tables 5 and 6 of this report reflect the
use of a historical trend yield of 140 bpa for corn and 46 bpa for soybeans.
The benchmark prices also differ somewhat from the previous report. The harvest
cash price for 1995 now is calculated at $3.11 for corn, versus $3.22 in the previous
report. This reflects the change in the time period during which most of the harvest
is assumed to have occurred. The harvest cash price for soybeans in 1995 remains
unchanged at $6.40. Also, the average price received by farmers in 1995 was changed
to reflect the actual marketing percentages reported by USDA, as opposed to the
use of historical averages that had been used in the previous report. The 1995
average price received for corn in the previous report also included a deduction
for shrink, which later was determined to cause "double-counting" of
this charge. The average price received by farmers for corn in 1995 now is calculated
at $3.11 for corn, versus $3.17 in the previous report. For soybeans, the average
price received now is calculated at $6.60, versus $6.64 in the previous report.
As shown in Table 5, the average net advisory
corn price over the two years for the 22 programs is $2.83 per bushel, which is
13 cents below the two-year average harvest cash price and equal to the two-year
average price received. The results range from a low of $2.27 to a high of $3.51.
The two-year results for soybeans are listed in Table
6. The two-year average net advisory soybean price is $6.92 per bushel, which
is 24 cents above the two-year average harvest cash price and three cents above
the two-year average price received. The results range from a low of $6.35 to
a high of $7.56.
The two-year results for the total advisory revenue are presented in Table
7. The average total advisory revenue for the two years is $343,602. This
is $4,064 lower than the two-year average harvest cash revenue, and $1,294 higher
than the average revenue implied by the average price received by Illinois farmers
for the two years.
The distributions of the two-year average prices and revenues are illustrated
in Figure 8. Only the 22 programs that were evaluated
in both 1995 and 1996 are included in the graphs. For corn, seven of the 22 programs
achieve a two-year average price within 11 cents of the two-year average harvest
cash price of $2.96. Two of the 22 programs achieve a two-year average corn price
between 12 and 34 cents greater than the harvest cash price, with one program
more than 35 cents above the harvest benchmark. Ten of the programs have a two-year
average between 12 cents and 34 cents below the harvest price, with two services
more than 58 cents below the harvest price for the two years.
For soybeans, the picture is quite different. Similar to corn, six of the 22
programs are within 11 cents of the two-year average harvest cash price of $6.68.
However, 14 of the programs achieve a two-year average soybean price that is 12
cents or more above the average harvest price. Eight of the programs are between
12 and 34 cents above the harvest cash price, with four programs between 35 and
57 cents above, one program between 58 and 80 above, and one program more than
81 cents above the harvest cash price. Only two services are more than 12 cents
below the harvest price.
In terms of total advisory revenue, half of the 22 marketing programs are within
$10,000 of the two-year average harvest cash revenue of (approximately) $348,000.
One of the programs achieves a total between $11,000 and $31,000 above the benchmark,
with one more program between $32,000 and $52,000 above the two-year benchmark.
Six of the programs are between $11,000 and $31,000 below the benchmark, with
two programs between $32,000 and $52,000 below the benchmark.
As shown in Figure 9, only four of the 22 corn
marketing programs achieved a two-year average net advisory price that was above
the two-year average harvest cash price of $2.96, while 11 of the 22 programs
were equal to or above the two-year average price received of $2.83. For soybeans
(Figure 10), 20 of the 22 programs achieved a two-year
average price that was above the two-year average harvest cash price of $6.68,
while 12 of the 22 programs were above the two-year average price received of
Figure 11 shows the comparison of the two-year
average net advisory revenues versus the two-year average revenues implied by
the harvest cash price and the average price received by farmers. Nine of the
22 advisory programs achieved a two-year average revenue that was above the two-year
harvest cash revenue of $347,666, while 12 of the 22 programs achieved an average
revenue greater than the average revenue received by farmers of $342,308.
*Thomas E. Jackson is the AgMAS Project Manager in the Department
of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign.
Scott H. Irwin and Darrel L. Good are Professors 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, Greg Price, and Janelle Smith. Valuable
comments were received from members of the AgMAS Project Review Panel.
1 Patrick, G.F. and S. Ullerich. "Information
Sources and Risk Attitudes of Large Scale Farmers, Farm Managers, and Agricultural
Bankers." Agribusiness. 12(1996):461-471.
2 Progressive Ag and Ag Alert for Ontario
are included in the study for the 1996 marketing year, but were not included in
1995. Grain Field Report, North American Ag, and Prosperous Farmer were in the
study for the 1995 marketing year, but are not included for 1996 because their
recommendations are no longer deemed to be "specific" enough to be evaluated.
Allendale futures & options and Ag Line by Doane hedge are new programs that
were introduced during the 1996 marketing year for corn only.
3 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.
4 There are a few instances where a service
clearly differentiates strategies based on the availability of on-farm versus
off-farm (commercial) storage. In these instances, recorded recommendations reflect
the off-farm storage strategy. Otherwise, services do not differentiate strategies
according to the availability of on-farm storage.
5 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."
6 Fackler, P.L., D.L. Young, and G.A. Carlson.
"Estimates of Trend and Variability Patterns in U.S. Crop Yields," in
Quantifying Long Run Agricultural Risks and Evaluating Farmers' Responses to
Risk. Proceedings of a seminar sponsored by the Southern Regional Project
S-252, Jekyll Island, Georgia, March 1993.
7 This procedure does not account for the
interest earnings or costs associated with a futures margin account.
8 Note that the season average prices presented
in Figure 5 are not adjusted for carrying costs.
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