Report 1998-02: Development of a Market Benchmark Price for AgMAS Performance
Darrel L. Good, Scott
H. Irwin, and Thomas E. Jackson
Copyright 1998 by Darrel L. Good,
Scott H. Irwin, and Thomas E. Jackson. 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 identify the appropriate market benchmark
price to use to evaluate the pricing performance of market advisory services that
are included in the annual AgMAS pricing performance evaluations. While it is
interesting to compare the net advisory price achieved as a result of following
one market advisory service versus another, it also is useful to compare the results
of an individual market advisory service, or the results of the service as a group,
with a ,benchmark0/00 measure of the market price during a particular marketing
Conceptually, a useful benchmark should: 1) be simple to understand
and to calculate; 2) represent the returns to a marketing strategy that could
be implemented by producers; 3) be directly comparable to the net
advisory price received from following the recommendations of a market advisory
service; 4) not be a function of the actual recommendations of the advisory services
or of the actual marketing behavior of farmers, but rather should be external
to their marketing activities; and 5) be stable, so that it represents
the range of prices made available by the market throughout the marketing period
instead of representing the price during a small segment of the marketing period.
Three potential specifications of the market benchmark price are considered:
the average price received by Illinois farmers, the harvest cash price, and the
average cash price over a two-year time span that extends from (approximately)
one year prior to harvest through one year after harvest.The average price received
by farmers is reported by USDA and is widely cited as a measure of the economic
condition of the farm sector. It is not directly comparable to the net advisory
price, however, because it includes quality discounts and premiums.The average
price received also is a function of farmers, actual marketing behavior.The harvest
cash price is very straightforward and easy to calculate because production risk
and storage costs are not included.However, in a given year, the harvest cash
price may not represent the average price that was available to farmers for that
The average cash price meets all of the selection criteria, except that it
would not be easily implementable by farmers since it involves marketing a small
portion of each crop every day of the two-year marketing window.It can be shown,
though, that the price realized via a more manageable strategy of ,spreading0/00
sales during the marketing window can very closely approximate the average cash
price.Therefore, it is determined that the average cash price meets all five selection
criteria, and is the most appropriate market benchmark to be used in evaluating
the pricing performance of market advisory services.
The objective of the Agricultural Market Advisory Service (AgMAS) project is
to evaluate the performance of selected agricultural market advisory services.One
of the principal components of that evaluation is the calculation of a ,net advisory
price0/00 received by farmers who follow the recommendations of an advisory service
for a given marketing year.The methodology for calculating that net advisory price
for corn and soybeans is described by Jackson, Irwin, and Good.Once the net advisory
price is calculated for each service, a relative evaluation of the services for
a particular marketing year and for multiple marketing years is straightforward.That
is, services can be compared to one another in terms of net price received from
following their recommendations.This is commonly referred to as a ,manager universe0/00
performance benchmark.In the stock market, for example, the performance of mutual
funds can be compared to each other (e.g., Bodie, Kane, and Marcus, pp. 723-724).
In addition to a relative comparison, it is useful to evaluate performance
in comparison to a market benchmark price.Comparison to a benchmark price is needed
to evaluate the performance of advisory services relative to pricing opportunities
offered by the market.Hence, this type of benchmark is commonly called a ,market0/00
performance benchmark.In the stock market, mutual funds can be, and are, evaluated
with respect to market benchmark performance criteria (e.g., Bodie, Kane, and
Marcus, pp. 725-747).These benchmarks are typically indexes of stock market returns
over the period of evaluation, e.g., the Dow Jones Industrial average, Standard
and Poor,s 500, etc.
For the evaluation of agricultural market advisory service performance, either
a single benchmark price or multiple benchmark prices can be employed.The challenge
is to identify and calculate useful benchmarks.This paper presents the characteristics
of a useful market benchmark, identifies potential benchmarks, and determines
which of the alternative specifications of a market benchmark is the most appropriate
for evaluating the performance of agricultural market advisory services.
Webster,s New Collegiate Dictionary defines a benchmark as ,a point
of reference from which measurements may be made0/00, or ,something that serves
as a standard by which others may be measured0/00.In the context of farm marketing
strategies, a market benchmark serves as ,a point of reference0/00 or ,standard0/00
to measure and evaluate the economic performance of the strategies. The importance
of selecting an appropriate market benchmark should be self-evident.
While market benchmarks are widely employed in studies of farm marketing strategies,
there is surprisingly little discussion of the properties a ,good0/00 benchmark
should possess.Nearly all studies of this type simply apply a given benchmark
without justification or discussion of alternatives. Fortunately, some guidance
can be found in the financial literature (e.g., Bailey, 1992a, 1992b).The following
list (Bailey, 1992a) is representative of the fundamental properties considered
to be important in constructing a benchmark for money managers:
Unambiguous: the names and weights of securities constituting the
benchmark are clearly delineated.
Investable: the option is available to forgo active management and
simply hold the benchmark
Measurable: the benchmark,s return can be calculated on a reasonably
Appropriate: the benchmark is consistent with the manager,s style.
Reflective of current investment options: the manager has current
investment knowledge of the securities that make up the benchmark.
Specified in advance: the benchmark is constructed prior to the
start of an evaluation period.
These properties cannot be applied directly to the
problem at hand, but they are representative of the type of characteristics that
need to be specified.
Five properties are proposed for an appropriate market benchmark for the evaluation
of market advisory services.These properties mirror those employed in the financial
literature with adjustments that recognize the agricultural setting:
Simplicity.The market benchmark price should be easy to understand
and easy to calculate.If the process is complicated, acceptance of the benchmark
is negatively impacted.
Implementability.There should be a straightforward marketing
strategy that could be employed by farmers that results in a net price equal to
the market benchmark.Otherwise, the benchmark is an abstract economic calculation
rather than a practical market benchmark for evaluating performance.
Comparability.The benchmark should be calculated in such
a way that it is directly comparable to the net price received based on advisory
service recommendations.For corn and soybeans, the benchmark price should reflect
the same grades, qualities, and location as the prices used in calculating advisory
service net prices.
Externality.The market benchmark price should not be based
on or calculated from the average performance of advisory services, or on the
pricing performance of farmers in general.That is, the benchmark should not be
relative, but should reflect pricing opportunities actually available in the market
during the evaluation period.The benchmark should reflect market performance,
not performance of market participants.
Stability.The benchmark should not be unduly influenced by
short-term price movements within a given marketing time frame.When measured over
many marketing periods, if corn and soybean markets are ,efficient0/00 the observed
price at a given time within the marketing period (after adjusting for carrying
costs) should closely approximate the average of all prices available over the
entire time frame. However, in any given marketing period the price measured over
a short time interval may differ substantially from the average price for the
In the next section, alternative specifications of the market benchmark price
are identified. Each is evaluated in terms of how well it meets the five properties
Three classes of market benchmarks can be identified in the literature on farm
marketing strategies. The first is the actual average price received by farmers
over the marketing period.The second is the market price for a single period during
the entire marketing time frame.The third is the average of market prices over
the marketing period.For the purposes of this study, the three classes of market
benchmarks will be represented by, respectively: 1) the average price received
by farmers; 2) the harvest cash price; and 3) the average cash price for the entire
marketing period.Each of these benchmarks will be analyzed in terms of their consistency
with the five properties identified in the previous section.
In the corn and soybean markets, one widely-cited benchmark price is the ,average
price received by farmers0/00 during the 12 month marketing year.This price is
estimated by the National Agricultural Statistical Service (NASS) of the U.S.
Department of Agriculture (USDA).Each month during the marketing year (September
through August) NASS surveys grain buyers (elevators) to determine the number
of bushels of each crop purchased from farmers and the average price paid for
those bushels.The average price is calculated as total expenditures for grain
divided by the number of bushels purchased.The calculation includes crops under
contract that were received and paid for in that month.At the end of the marketing
year, a weighted average price per bushel is calculated for each state and the
At first glance, it would appear that the average price received includes only
prices that were available during the 12-month marketing year as defined by USDA
(September 1 of the harvest year through August 31 of the following year for corn
and soybeans).However, cash-forward transactions also are included in the average
price received.For example, the average price received for the month of October
includes not only spot cash sales during the month of October, but also grain
delivered during October to fill cash-forward contracts.Therefore, the reported
average price received for the month of October includes some grain that is being
sold for the cash prices quoted in October and some grain that is being sold for
a cash-forward price that could have been fixed months in advance.
While the average price received is a widely used benchmark, it fails to exhibit
nearly all of the properties of a useful benchmark.First, as the above discussion
highlights, the average price received is far from simple to calculate. Second,
the average price received by all producers does not represent a strategy that
could be implemented by an individual producer, since the timing and amount of
marketings is not known in advance. Third, the average price received for corn
and soybeans ,... reflects prices received by farmers for all classes and grades
of the commodity being sold, including quality premium or discounts0/00 (USDA).In
the AgMAS project, the net advisory price is calculated using the overnight bid
of country elevators for No. 2 yellow corn and No. 1 yellow soybeans in Central
Illinois.These prices are collected and reported daily by the Illinois Market
News Service.Since quality discounts can be large, especially for corn, the average
price received (as reported by USDA) is not comparable to the quoted bid price
for a standard grade.The primary function of the USDA,s average price received
estimate is for input into farm income calculations, not as a benchmark of market
performance. Fourth, the average price received is influenced by the timing of
pricing decisions of corn and soybean producers.Conceptually, an average price
received reflects the marketing performance of farmers, rather than the range
of available market prices.It is a relative benchmark rather than an external
or objective benchmark. Finally, the average cash price received is only available
on a statewide basis, whereas the AgMAS calculation is for central Illinois.This
introduces another potential bias, since the average cash basis for the entire
state may be different from the cash basis in central Illinois.
A second benchmark price that is often used to evaluate producer or advisory
service performance is the ,average harvest cash price0/00, or more specifically
the average daily bid price for a standard grade during the harvest period.The
selection of a single period price is justified with the argument that efficient
markets will not demonstrate seasonality after adjusting for carrying costs over
long periods of time. The average price during any time period, adjusted for storage
costs, should equal the average price during any other time period and should
equal the marketing year average in the long run. The harvest period is often
selected in marketing strategy studies since it reflects a strategy that could
be implemented by producers, incurs no storage costs, and eliminates the yield
uncertainty associated with pre-harvest sales.
The average harvest cash price meets four of the desired properties for a market
benchmark.It is simple, easy to implement, comparable to net advisory price, and
based on prices external to actual farmer or advisory service behavior.However,
it violates the stability property specified for selection of a benchmark price.For
any particular marketing year, the harvest period may be an ,outlier0/00 and not
reflect average prices for the marketing year.That being the case, single period
average prices may demonstrate significant variability from year to year, even
though in the long-term they may be reflective of average prices.
A third market benchmark candidate is the concept of an ,average cash price0/00
offered by the market for a standard grade across the entire marketing time horizon.
There are several issues related to the construction of the average cash price.First,
since the average cash price gives equal weight to daily prices throughout the
entire marketing window, daily prices must be weighted by some factor.Prior to
harvest, the daily prices need to be weighted based on expected yield, while post-harvest
prices need to be weighted by actual yields.In most years, those yields will be
different.The adjustment, however, can be easily accommodated by changing the
daily weighting factor after the actual crop size is known.
Another issue in the use of an average cash price benchmark is determination
of the appropriate pricing period.It can be argued that for corn and soybeans,
the pricing period ends just prior to the harvest of the next crop.Storage into
the next crop year or deferred pricing arrangements are possible, but are not
common and are generally not recommended by market advisory services.The more
difficult task is to determine the beginning of the pricing period.Since futures
contracts begin trading two or more years prior to maturity, an extremely long
pricing period is possible.Some restriction on the starting date seems reasonable,
however, based on common producer practices and recommendations of market advisory
services.Observation suggests that it is uncommon to routinely price corn and
soybeans more than a year prior to harvest.The pricing period for a given year,s
crop, then, can be reasonably defined as a two-year period -- from September in
the year prior to planting through August in the year after harvest.The average
cash price would capture the full range of forward pricing opportunities and the
opportunities to sell grain out of storage following harvest.
A final issue is that the cash price data that are available for corn and soybeans
in central Illinois do not span the entire two year pricing period.The Illinois
Department of Agriculture typically begins reporting ,new crop0/00 contract bids
(harvest delivery) in February prior to harvest. Those contract bids are not available
for the previous September through January period.Those prices, however, can be
approximated by using the daily closing prices of the appropriate new-crop futures
contract during the September through January period and the actual new crop basis
implied in the first ,new crop0/00 bid in February.
This concept of an average cash price is easy to calculate ^ it is the simple
average of daily prices for the entire marketing window, with post-harvest prices
discounted by storage and ownership costs to produce a ,harvest-equivalent0/00
price.The average cash price is comparable to the net advisory price, since both
are calculated using the same cash price series, and post-harvest prices are adjusted
to a harvest equivalent. The average cash price provides an external, objective
measure of the actual pricing opportunities available during the marketing window.Such
a benchmark allows the evaluation of advisory services in comparison to the market
instead of a relative measure of farmer performance. A potential shortcoming is
that a producer strategy to achieve the ,average cash price0/00 would be extremely
difficult to implement.Selling one five-hundredth of the crop every business day
for two years obviously is not practical.
Table 1 provides a summary comparison of the
previous discussion of the alternative market benchmarks.The comparison quickly
leads to the conclusion that the average price received is not a useful benchmark
for the evaluation of market advisory service performance, as it exhibits only
one of the five properties. The other two benchmarks exhibit four of the five
properties. Unfortunately, each fails on a different property (harvest cash price:
stability; average cash price: implementability), so there is not a clear preferred
benchmark.For this reason, we turn to an analysis of the empirical behavior of
the benchmark candidates.
The values of the three proposed market benchmarks were calculated for the
1990 through 1997 corn and soybean crops.This time period was considered long
enough to make meaningful quantitative comparisons, and still be able to validly
apply available data on storage costs
While the analysis of properties in the previous section eliminated the average
price received from consideration, it is included for comparison purposes.The
,average price received0/00 was calculated as follows:
The average monthly price received by Illinois farmers was weighted by
the percentage of the crop marketed for each month. Both of these data series
are reported by USDA in the Agricultural Prices publication.
All post-harvest sales are adjusted for carrying costs.
No yield adjustment is made, since it is impossible to identify which sales
were made prior to harvest.
The ,harvest cash price0/00 was calculated as the simple average of the daily
cash prices in Central Illinois for a five-week period centered on the harvest
mid-point.The harvest mid-point is the day that harvest progress reached 50 percent
in Central Illinois.No yield adjustment is made, since actual yield is assumed
to be known.No carrying charges are assigned, since no storage of the crop occurs.
The ,average cash price0/00 is a weighted average of the daily cash prices
in Central Illinois over a two-year marketing window that is centered (approximately)
on the harvest period for the given crop.For example, the marketing window for
the 1995 crop begins on September 1, 1994, and ends on August 31, 1996.Graphs
of the daily prices used in computing the average cash price can be found in Figures
1-16.Prior to harvest, the expected (trend) yield is used to determine the
weighting factor for each day.From harvest on, the weighting factor is based on
the actual reported yield for the crop year.Post-harvest prices are adjusted to
a harvest equivalent by subtracting the accrued carrying charges.
The results for the 1990 through 1997 marketing years, plus the mean and standard
deviation for each benchmark across the eight crop marketing periods, are reported
in Tables 2 and 3.All of the benchmarks are calculated
on a ,harvest equivalent0/00 basis, i.e., all post-harvest prices are net of storage
charges.The details of the calculation of each benchmark, including the storage
charges and weights used in the averaging, are included in the Technical Appendix
of this report.The Central Illinois cash prices and harvest equivalent prices
for corn and soybeans for the 1990 through 1997 marketing years are illustrated
in Figures 1 through 16.
In the case of corn, the mean of the average cash prices for the eight-year
period was $2.34 per bushel.The mean of the harvest cash prices was $2.40, and
the mean of the average prices received by Illinois farmers was $2.29. The standard
deviation of the average cash prices was $0.28 per bushel, around 10 cents per
bushel less than the standard deviation of the average prices received and the
harvest cash prices.For individual years, the harvest price varied by as much
as $0.32 from the average cash price.This confirms that there is reason to be
concerned about the stability of the harvest cash price as a market benchmark
in individual years.
In the case of soybeans, the mean of the average cash prices for the eight-year
period was $6.00 per bushel, equal to the mean of the harvest cash prices.The
mean of the average prices received by Illinois farmers was only slightly less,
at $5.97.For individual years, the harvest cash prices varied by as much as $.41
from the average cash prices. As with corn, the standard deviation of the average
cash prices was lower than the standard deviation of the average prices received
and the harvest cash prices by around 10 cents per bushel.
The empirical results suggest that the average cash price (not surprisingly)
is more stable than the harvest cash price.Hence, based on the stability property,
the average cash price is the preferred market benchmark.But there is still the
issue of implementation with respect to the average cash price.
As mentioned previously, there is no practical way for a producer to implement
a marketing strategy that would precisely capture the average cash price.The question
then becomes ,Is there a mechanical (naive) pricing strategy that is implementable
and would approximate the average cash price?0/00 In order to evaluate whether
the implementability of the average cash price is a relevant concern, the price
results of three mechanical strategies were empirically compared to the average
cash price for the 1990 through 1997 crop years for corn and soybeans.
The three mechanical strategies included in the empirical analysis were:
25 percent of the crop on May 15 (or nearest business day) prior to harvest; 25
percent on October 15; 25 percent on February 15 after harvest; and 25 percent
on July 15 after harvest;
one-twelfth of the crop on September 15 in the year prior to planting and an additional
one-twelfth of the crop on the 15th of every other month through July
following harvest; and
one-twelfth of the crop on the 15th of each month from September of
the year of harvest through August following harvest.
Average prices for each of the strategies were calculated using the following
pre-harvest sales were weighted by expected (calculated trend) yield.
post harvest sales were weighted by actual yield, with the adjustment from expected
to actual averaged over all post harvest sales.
post harvest prices were adjusted for carrying charges to produce a harvest-equivalent
The results for the three naive ,mechanical0/00 strategies are reported in
Tables 4 and 5.The mean of the annual prices achieved
by the three mechanical strategies for corn ranged from $2.31 to $2.36 per bushel.On
average, each of the alternatives approximates the average cash price. For strategies
1 and 3, the largest annual difference from the average cash price was $0.47 and
$0.76, respectively. For strategy 2, however, the annual difference from the average
cash price did not exceed $0.05 per bushel.The average cash price is highly correlated
with strategies 1 and 2, with correlation coefficients of 0.974 and 0.996, respectively.
The correlation between the average cash price and strategy 3 is 0.917.
For soybeans, the mean of the annual prices of the mechanical strategies varied
from $5.94 to $6.04. As with corn, the aggregate results were similar for all
the potential benchmarks and mechanical strategies.For strategies 1 and 3, the
largest annual difference from the average cash price was $0.34 and $0.63, respectively.For
strategy 2, however, the annual difference from the average cash price did not
exceed $0.10 per bushel.The correlations also are similar to those for corn. The
average cash price is highly correlated with strategies 1 and 2, with correlation
coefficients of 0.970 and 0.997, respectively. The correlation between the average
cash price and strategy 3 is 0.929.
This analysis suggests that the average cash price benchmark for corn and soybeans
in central Illinois can be closely approximated by a simple mechanical pricing
strategy.That strategy involves pricing one-twelfth of the crop on the 15th
day of the month every other month from September in the year before harvest through
July after harvest. That being the case, the average cash price meets all of the
crucial properties of a sound benchmark price.
Bailey, J.V.,Are Manager Universes Acceptable Benchmarks?0/00 Journal of
Portfolio Management. 18(1992a): 9-13.
Bailey, J.V.,Evaluating Benchmark Quality0/00.Financial Analysts Journal.48(1992b):
Bodie, Z., A. Kane, and A.J. Marcus. Investments.Irwin: Homewood, IL,
Jackson, Thomas E., Scott H. Irwin, and Darrel L. Good, 1996 Pricing Performance
of Marketing Advisory Services for Corn and Soybeans, AgMAS Project Research
Report 1998-01, January 1998.
United States Department of Agriculture, Statistical Reporting Service, Scope
and Methods of the Statistical Reporting Service, Miscellaneous Publication
Number 1308, Revised September 1983.
This section describes the data and assumptions used to calculate the results
of the benchmark prices and the mechanical pricing strategies.
The daily cash prices used in the benchmark price calculations are Central
Illinois prices for No. 2 yellow corn and No. 1 soybeans.These prices are collected
and reported on a daily basis by the Illinois Market News Service. Prices for
the post-harvest period are the posted overnight spot cash bids for each day.For
the pre-harvest period, the cash-forward basis for Central Illinois on each Thursday
is used to calculate the cash-forward price.The basis is assumed to remain constant
until the next Thursday when a new basis is reported.The daily cash-forward price
series is then generated by applying this cash basis to the daily futures settlement
price of the Chicago Board of Trade.The December futures contract is used for
corn and the November futures contract is used for soybeans.
For the purposes of this project, daily cash-forward prices are used beginning
with the first business day of September of the year prior to harvest.Although
new-crop corn and soybean futures contracts are traded with sufficient daily trading
volume at this time, cash-forward basis bids are not reported by the Illinois
Market News Service until January or February of the year of harvest.Therefore,
an assumption is made about the appropriate cash-forward basis to be used for
the four to five months before actual reported bids are available. In this study,
the first actual cash bid to be reported is assumed to be the appropriate basis
for the period before the bids are available.For example, the first actual cash-forward
bid for the 1996 corn crop was reported on January 18, 1996, and was 18.5 cents
below the December 1996 futures contract.Therefore, the daily cash-forward bids
for the 1996 crop from September 1, 1995 through January 17, 1996 is calculated
as the December 1996 corn futures closing price minus 18.5 cents.
The actual dates of harvest for corn and soybeans are an important factor for
several calculations in this report.The time of harvest determines the
dates over which the harvest cash price is calculated, and the timing of the yield
adjustment and storage charge calculations.Since the actual date of harvest can
vary by several weeks, an assumption of a single time period (e.g., the month
of October) for all years is not appropriate.
For the purpose of this study, a five-week harvest ,window0/00 is used.In most
years, a five-week window will include about 80 percent of the harvest.This five-week
window is centered on the date when harvest is 50% complete in the Central Illinois
Crop Reporting District, as reported by the Illinois Agricultural Statistics Service
each Monday during harvest in its Weekly Crop Progress publication.Since the 50%
completion date rarely occurs exactly on the report date, a linear interpolation
is done for the week during which the 50% mark was reached.For example, if harvest
progress is reported at 40% complete in one report and 54% in the next report,
it is assumed that harvest progressed at a rate of 2% per day (14%/7 days per
week) for that week.In most weeks it is unlikely that equal amounts of progress
were made each day, but a more precise calculation is not feasible given the data
Once the date of 50% harvest progress is identified, that date is used as the
mid-point of harvest. The five-week harvest window is constructed using the 12
business days before and after this harvest mid-point.The harvest period, then,
consists of 25 business days, or 5 business weeks.The harvest periods and mid-points
for 1990 through 1997 are reported in Table A.2.
In evaluating benchmark strategies, changing yield expectations are a factor
for any strategy that includes sales made prior to harvest.In this study, this
is an issue that impacts the calculation of the average cash price and naive strategies
1 and 2.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 determine how much crop should be sold. Prior
to harvest, the best estimate of the current year,s expected yield is a function
of yield in previous years.In this study, the assumed yield prior to harvest is
the calculated trend yield, while the actual reported yield is used from the harvest
The expected yield is based upon a linear regression trend model of actual
Central Illinois yields from 1972 through the year prior to harvest.For example,
the calculated trend yield for the 1991 crop is estimated using actual yield data
from 1972 through 1990, while the trend yield for the 1996 crop uses data through
1995.The calculated trend yields and actual observed yields from 1990 through
1997 are listed in Table A.1.
When calculating the average cash price, the daily weighting factor is the
expected yield divided by the number of business days in the entire marketing
year. For example, in 1992 the trend yield for corn is 122.9 bushels per acre
(bpa), and there are 502 business days (days for which corn prices are quoted)
in the marketing year extending from September 1991 through August 1993.Therefore,
for each day prior to the 1992 harvest, the price is weighted by 0.245 bpa (122.9/502).
At the beginning of the harvest period, the actual yield is assumed to be known.In
1992, the harvest period began on October 6. By this time, the daily prices had
been weighted by a total of 67.3 bpa.The actual realized yield for 1992 was 158
bpa.Therefore, as of October 6 there were 91.7 bpa (158 - 67.3) of the 1992 crop
left to be sold, and there were 227 business days left in the marketing year.The
daily weight was then changed to 0.399 bpa (91.7/227) through the end of the marketing
window.This daily weighting of sales results in total sales of the 1992 crop of
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 with the end of the harvest period.Physical
storage charges are assumed to be a flat 13 cents per bushel from harvest through
December 31.After January 1, physical storage charges are assumed to be 2 cents
per bushel per month, 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 used to calculate opportunity cost of capital is the average
rate for all commercial agricultural loans for the fourth quarter of the harvest
year and the subsequent three quarters as reported in the Agricultural Finance
Databook published by the Board of Governors of the Federal Reserve Board.The
interest charge for storing grain is the interest rate compounded daily from the
mid-point of harvest to the date of sale. The annual interest rates are listed
in Table A.3.
In addition to the storage and interest costs, another charge is assigned to
corn (but not soybeans) that goes into commercial storage.This charge, referred
to as a ,shrink charge0/00, is commonly deducted by commercial elevators on 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.The per-bushel charge for the
volume reduction is 1.3% times the harvest period cash price for the given marketing
It should be noted that the cost of drying corn 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.