1998 Pricing Performance of Market Advisory Services for Corn and Soybeans
L. Good, Scott H. Irwin,
Thomas E. Jackson, Mark A. Jirik and Joao
2000 by Darrel L. Good, Scott H. Irwin, Thomas E. Jackson, Mark A. Jirik
and Joao Martines-Filho. All rights reserved. Readers may make verbatim
copies of this document for non-commercial purposes by any means, provided
that this copyright notice appears on all such copies.
advisory service marketing recommendations used in this research represent
the best efforts of the AgMAS Project staff to accurately and fairly interpret
the information made available by each advisory program. In cases where
a recommendation is vague or unclear, some judgment is exercised as to
whether or not to include that particular recommendation or how to implement
the recommendation. Given that some recommendations are subject to interpretation,
the possibility is acknowledged that the AgMAS track record of recommendations
for a given program may differ from that stated by the advisory service,
or from that recorded by another subscriber. In addition, the net advisory
prices presented in this report may differ substantially from those computed
by an advisory service or another subscriber due to differences in simulation
assumptions, particularly with respect to the geographic location of production,
cash and forward contract prices, expected and actual yields, carrying
charges and government programs.
The primary purpose
of this research report is to present an evaluation of advisory service
pricing performance for the 1998 corn and soybean crops. In order to evaluate
the returns to the marketing advice produced by the services, the AgMAS
Project purchases a subscription to each of the programs offered by a
service. The information is received electronically via DTN, world wide
web sites or e-mail. Staff members of the AgMAS Project read the information
provided by each advisory program on a daily basis. A directory of the
advisory programs included in the study can be found at the Agricultural
Services (AgMAS) Project website (http://www.aces.uiuc.edu/~agmas/).
assumptions are made to produce a consistent and comparable set of results
across the different advisory programs. These assumptions are intended
to accurately depict "real-world" marketing conditions. Several key assumptions
are: i) with a few exceptions, the marketing window for the 1998 crops
is September 1, 1997 - August 31, 1999, ii) cash prices and yields refer
to a central Illinois producer, iii) all storage is assumed to occur off-farm
at commercial sites, and iv) marketing loan recommendations made by advisory
programs are followed wherever feasible.
The average net advisory
price across all 23 corn programs in 1998 is $2.17 per bushel, seven cents
below the market benchmark price. The range of net advisory prices for
corn is substantial, with a minimum of $1.93 per bushel and a maximum
of $2.51 per bushel. The average net advisory price across all 22 soybean
programs in 1998 is $5.82 per bushel, four cents less than the market
benchmark. As with corn, the range of net advisory prices for soybeans
is substantial, with a minimum of $5.11 per bushel and a maximum of $6.58
per bushel. The average revenue achieved by following both the corn and
soybean programs offered by an advisory service is $304 per acre, six
dollars less than market benchmark revenue for 1998. The spread in advisory
revenue also is noteworthy, with the difference between the bottom- and
top-performing advisory programs reaching nearly $60 per acre.
An advisory program,s
net price or revenue received is an important indicator of performance.
However, it is the tradeoff between pricing performance and risk that
is likely to be of greatest interest to producers. Based on the data available
for 1995-1998, a positive tradeoff between average net advisory price
and risk is found; producing higher net prices generally requires that
an advisory program take on more risk, and vice versa. Only one
advisory program in corn outperforms the market benchmark when both price
and risk are considered. Two do so in soybeans, and none based on revenue.
These performance results are somewhat sensitive to the specification
of the market benchmark. In addition, it is important to emphasize that
the pricing and risk performance results are based on only four observations.
This is a small sample for estimating the true risks of market advisory
programs. Hence, the return-risk results should be viewed as exploratory
rather than definitive.
Introduction to the
operate in a highly uncertain economic environment. The roller coaster
movement of corn and soybean prices since 1995 is ample evidence of the
uncertainty and risk facing grain producers. In this rapidly changing
environment, marketing and risk management play an important role in the
overall management of farm businesses. The use of private-sector advisory
services has increased over time as producer demand for marketing and
risk management advice has increased. Surveys document the high value
that many producers place on market advisory services (Patrick and Ullerich;
Patrick, Musser, and Eckman; Schroeder, Parcell, Kastens and Dhuyvetter).
Despite their current
popularity and expected importance in the future, surprisingly little
is known about the marketing and risk management strategies recommended
by these services and their associated performance. There is a clear need
to develop an ongoing "track record' of the performance of these
services. Information on the performance of advisory services will assist
producers in identifying successful alternatives for marketing and price
Services (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, 434a Mumford Hall, 1301 West Gregory Drive, University
of Illinois at Urbana-Champaign, Urbana, IL 61801; voice: (217)333-2792;
fax: (217)333-5538; e-mail: firstname.lastname@example.org. The AgMAS Project also has
a website that can be found at the following address: http://www.aces.uiuc.edu/~agmas/.
Funding for the AgMAS
project is provided by the following organizations: American Farm Bureau
Foundation for Agriculture; Illinois Council on Food and Agricultural
Research; Cooperative State Research, Education, and Extension Service,
U.S. Department of Agriculture; Economic Research Service, U.S. Department
of Agriculture and the Risk Management Agency, U.S. Department of Agriculture.
Purpose of Report
The primary purpose
of this research report is to present an evaluation of advisory service
pricing performance for the 1998 corn and soybean crops. Specifically,
the net price received by a subscriber to an advisory service is calculated
for corn and soybean crops harvested in 1998. With a few exceptions, the
marketing window for the 1998 crops is September 1, 1997 through August
31, 1999. Another purpose of this report is to compare the pricing performance
results for the 1998 corn and soybean crops with previously released results
for the 1995, 1996 and 1997 crop years.
An important point
to consider is that the pricing results are available for only four marketing
periods. It is inappropriate to draw too many conclusions from four
crop years' results. A useful analogy is university yield trials for
crop varieties. 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 variety versus another can
only be drawn after a number of years of results are available. The same
is true for market advisory services.
It is also important
to recognize that the performance results in this report emphasize the
pricing, or return, element of marketing and risk management. While certainly
useful, such results do not address the issue of risk. Two advisory services
with the same net price may expose producers to quite different risks
through the marketing period. The final section of this report contains
a "first look" at the relationship between the pricing performance and
risk of advisory services. Since the return-risk results are based on
just four years of data, the results must be viewed quite cautiously.
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,
Director of Higher Education Programs with the Cooperative State Research,
Education, and Extension Service, US Department of Agriculture; Frank
Buerskens, independent agribusiness consultant in Bloomington, Illinois;
Renny Ehler, producer 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 producer in Rawlins County, Kansas; and
Robert Wisner, University Professor in the Department of Economics at
Iowa State University.
The next section
of the report describes the procedures used to collect the data on market
advisory service recommendations. The following section describes the
methods and assumptions used to calculate the returns to marketing advice.
The third section of the report presents 1998 pricing results for corn
and soybeans. The fourth section presents a summary of the combined results
for the 1995, 1996, 1997, and 1998 marketing periods. The final section
presents initial results on the tradeoff between pricing performance and
risk of market advisory services.
The market advisory
services included in this evaluation do not comprise the population of
market advisory services available to producers. The included services
also are not a random sample of the population of market advisory services.
Neither approach is feasible because no public agency or trade group assembles
a list of advisory services that could be considered the "population."
Furthermore, there is not a generally agreed upon definition of an agricultural
market advisory service. To assemble the sample of services for the AgMAS
Project, criteria were developed to define an agricultural market advisory
service and a list of services was assembled.
The first criterion
used to identify services is that a service has to provide marketing advice
to producers. Some of the services tracked by the AgMAS Project do provide
speculative trading advice, but that advice must be clearly differentiated
from marketing advice to producers for the service to be included. The
terms "speculative" trading of futures and options versus the
use of futures and options for "hedging" purposes are used for
identification purposes only. A discussion of what types of futures and
options trading activities constitute hedging, as opposed to speculating,
is not considered.
The second criterion
is that specific advice must be given for making cash sales of the commodity,
in addition to any futures or options hedging activities. In fact, some
marketing programs evaluated by the AgMAS Project do not make any futures
and options recommendations. However, marketing programs that make futures
and options hedging recommendations, but fail to clearly state when cash
sales should be made, or the amount to be sold, are not considered.
A third, and fairly
obvious, criterion is that the advice must be transmitted to subscribers
before the action is to be taken. This is largely the reason why electronically-delivered
services are evaluated. Recommendations that take the form of, "Today
would have been a good day to sell," that are received by a subscriber
after the market has closed are clearly of little value from a marketing
The original sample
of market advisory services that met the three criteria was drawn from
the list of "Premium Services" available from the two major
agricultural satellite networks, Data Transmission Network (DTN) and FarmDayta,
in the summer of 1994.,
 While the list
of advisory services available from these networks was by no means exhaustive,
it did have the considerable merit of meeting a market test. Presumably,
the services offered by the networks were those most in demand by farm
subscribers to the networks. In addition, the list of available services
was cross-checked with other farm publications to confirm that widely-followed
advisory firms were included in the sample. It seems reasonable to argue
that the resulting sample of services was (and remains) generally representative
of the majority of advisory services available to producers.
Two forms of sample
selection biases may be potential problems when assembling an advisory
program database. The first form is survival bias, which occurs if only
advisory programs that remain in business at the end of a given
period are included in the sample. Survival bias significantly biases
measures of performance upwards since "survivors" typically
have higher performance than "non-survivors."
This form of bias should not be present in the AgMAS database of advisory
programs because all programs ever tracked are included in the sample.
The second and more subtle form of bias is hindsight bias, which occurs
if data from prior periods are "back-filled" at the point in
time when an advisory program is added to the database. Statistically,
this has the same effect as survivorship bias because data from surviving
advisory programs is back-filled. This form of bias should not be present
in the AgMAS database because recommendations are not back-filled when
an advisory program is added. Instead, recommendations are collected only
for the marketing period after a decision has been made to add
an advisory program to the database.
The actual daily
process of collecting recommendations for the sample of advisory programs
begins with the purchase of subscriptions to each of the programs. Staff
members of the AgMAS Project read the information provided by each advisory
program on a daily basis. The information is received electronically,
via DTN, web sites or email. For the programs that provide two daily updates,
typically in the morning and at noon, information is read in the morning
and afternoon. In this way, the actions of a producer-subscriber are simulated
of each advisory program are recorded separately. Some advisory programs
offer two or more distinct marketing programs. This typically takes the
form of one set of advice for marketers who are willing to use futures
and options (although futures and options are not always used), and a
separate set of advice for producers who only wish to make cash sales.
In this situation, both strategies are recorded and treated as distinct
strategies to be evaluated.
When a recommendation
is made regarding the marketing of corn or soybeans, the recommendation
is recorded. In recording recommendations, specific attention is paid
to which year,s crop is being sold, (e.g., 1998 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 1999 futures reach $2.50). When price targets are
given and not immediately filled, such as a stop order in the futures
market, the recommendation is noted until the order is either filled or
are used to check the recorded recommendations for accuracy and completeness.
Whenever possible, recorded recommendations are cross-checked against
later status reports provided by the relevant advisory program. Also,
at the completion of the marketing period, it is confirmed whether cash
sales total exactly 100 percent, all futures positions are offset, and
all options positions are offset or expire worthless.
final set of recommendations attributed to each advisory program represents
the best efforts of the AgMAS Project staff to accurately and fairly interpret
the information made available by each advisory program. In cases where
a recommendation is considered vague or unclear, some judgment is exercised
as to whether or not to include that particular recommendation. This occurs
most often when a program suggests "a producer might consider" a position,
or when minimal guidance is given as to the quantity to be bought or sold.
Given that some recommendations are subject to interpretation, the possibility
is acknowledged that the AgMAS track record of recommendations for a given
program may differ from that stated by the advisory program, or from that
recorded by another subscriber.
Calculating the Returns
to Marketing Advice
the end of the marketing period, all of the (filled) recommendations are
aligned in chronological order. The advice for a given marketing period
is considered to be complete for each advisory program when cumulative
cash sales of the commodity reach 100 percent, all futures positions covering
the crop are offset, all option positions covering the crop are either
offset or expire, and the advisory program discontinues giving advice
for that crop year, such as re-ownership via futures or call options.
The returns to each recommendation are then calculated in order to arrive
at a weighted average net price that would be received by a producer who
precisely follows the marketing advice (as recorded by the AgMAS Project).
In order to produce
a consistent and comparable set of results across the different advisory
programs, certain explicit assumptions are made. These assumptions are
intended to accurately depict "real-world" marketing conditions.
The simulation is
designed to reflect conditions facing a representative central Illinois
corn and soybean producer. Whenever possible, data are collected for the
Central Crop Reporting District in Illinois as defined by the National
Agricultural Statistics Service (NASS) of the US Department of Agriculture
(USDA). The eleven counties (DeWitt, Logan, McLean, Marshall, Macon, Mason,
Menard, Peoria, Stark, Tazewell, and Woodford) that make up this District
are highlighted in Figure 1.
It should be noted
that the relative results of the analysis are likely to be similar if
another geographic location is used. The calculated returns to all the
trading programs (as well as the benchmark prices) would most likely "shift"
due to basis differentials. However, the exact results may differ somewhat
for areas outside of central Illinois.
In general, a two-year
marketing window, spanning September 1, 1997 through August 31, 1999,
is used in the analysis. The beginning date is selected because it reflects
a "realistic" time period in which new crop sales begin. The ending date
is selected to be consistent with the ending date for corn and soybean
marketing years as defined by the USDA. There are some exceptions to the
marketing window definition. Four advisory programs had relatively small
amounts (15 percent or less) of cash corn or soybeans unsold as of August
31, 1999. In each of these four cases, the grain was sold in the spot
cash market in the first half of September 1999. One advisory program
sold 10 percent of corn production using a post-harvest forward contract
for delivery in January 2000. Four programs maintained relatively large
(40 percent or more) long call "re-ownership" positions for corn and/or
soybeans until October or November 1999. Finally, three advisory programs
also began pre-harvest hedges prior to September 1, 1997. In all of the
previous cases, the actual recommendations on the indicated dates are
recorded and used in the analysis.
The price assigned
to each cash sale recommendation is the central Illinois closing, or overnight,
bid. The data are collected and reported by the Illinois Department of
Ag Market News.
The central Illinois price is the mid-point of the range of bids by
elevators in the North Central and South Central Price Reporting Districts,
as defined by the Illinois Department of Ag Market News. Prices in this
25-county area best reflect prices for the assumed geographic location
of the representative central Illinois producer (Central Illinois Crop
forward contract prices for Fall delivery are also needed. Pre-harvest
bids collected by the Illinois Department of Ag Market News are used when
available. The central Illinois pre-harvest price is the mid-point of
the daily range of pre-harvest bids by elevators in the North Central
and South Central Price Reporting Districts, again, as defined by the
Illinois Department of Ag Market News. Pre-harvest forward prices from
this source are available for corn and soybeans from February 2, 1998
to September 18, 1998.
Since the marketing
window for the 1998 corn and soybean crops begins in September 1997, and
the Illinois Department of Ag Market News did not begin to report actual
cash forward bids until February 2, 1998, pre-harvest prices need to be
estimated for the first few months of the marketing window. For a date
between September 1, 1997 and January 30, 1998, a two-step estimation
procedure is adopted. First, the forward basis for the period in question
is estimated by the average forward basis for the first five days actual
forward contract bids are reported by the Illinois Department of Ag Market
News (February 2-6, 1998). Second, the estimated forward basis is subtracted
from the settlement price of the Chicago Board of Trade (CBOT) 1998 December
corn futures contract or 1998 November soybean futures contract between
September 1, 1997 and January 30, 1998. This estimation procedure is expected
to be a reasonably accurate reflection of actual forward prices for the
early period of the marketing window, as the actual price of the harvest
futures contract is used and only the forward basis is estimated.
market advisory programs recommended the use of post-harvest forward contracts
to sell part of the 1998 corn and soybean crops. The Illinois Department
of Ag Market News did report post-harvest bids for January delivery from
September 22, 1998 to December 14, 1998. These bids for central Illinois
are used wherever applicable. However, most of the positions recommended
by advisory programs either did not match the January delivery period
or were made after the Illinois Department of Ag Market News stopped reporting
post-harvest forward contract prices. The following procedure is adopted
to estimate the additional post-harvest forward contract prices needed
in the analysis. First, three elevators in central Illinois who agreed
to supply data on spot and forward contract prices on the dates when advisors
made such recommendations were contacted. Each of these elevators is in
a different county in the Central Illinois Crop Reporting District (Logan,
McClean, DeWitt). Second, the spread between each elevator,s forward price
and spot price is calculated for the relevant date. Third, the forward
spread is averaged across the three elevators for the same date. Fourth,
the average forward spread from the three elevators is added to the central
Illinois cash price (discussed at the beginning of the section) to arrive
at an estimated post-harvest forward contract price for central Illinois.
The fill prices for
futures and options transactions generally are the prices reported by
the programs. In cases where a program did not report a specific fill
price, the settlement price for the day is used. This methodology does
not account for liquidity costs in executing futures and options transactions.
Since most of the
advisory program recommendations are given in terms of the proportion
of total production (e.g., "sell 5 percent of 1998 crop today"), some
assumption must be made about the amount of production to be marketed.
For the purposes of this study, if the per-acre yield is assumed to be
100 bushels, then a recommendation to sell 5 percent of the corn crop
translates into selling 5 bushels. When all of the advice for the marketing
period has been carried out, the final per-bushel selling price is the
average price for each transaction weighted by the amount marketed in
The above procedure
implicitly assumes that the "lumpiness" of futures and/or options contracts
is not an issue. Lumpiness is caused by the fact that futures contracts
are for specific amounts, such as 5,000 bushels per CBOT corn futures
contract. For large-scale producers, it is unlikely that this assumption
adversely affects the accuracy of the results. This may not be the case
for small- to intermediate-scale producers who are less able to sell in
5,000 bushel increments.
Yields and Harvest
When making hedging
or forward contracting decisions prior to harvest, the actual yield is
unknown. Hence, an assumption regarding the amount of expected production
per acre is necessary to accurately reflect the returns to marketing advice.
Prior to harvest, the best estimate of the current year,s expected yield
is likely to be a function of yield in previous years. In this study,
the assumed yield prior to harvest is the calculated trend yield, while
the actual reported yield is used from the harvest period forward. The
expected yield is based upon a linear regression trend model of actual
yields from 1972 through 1997 for the Central Illinois Crop Reporting
District. Previous research suggests a regression trend model produces
relatively accurate yield forecasts.
In central Illinois,
the expected 1998 yield for corn is calculated to be 143.2 bushels per
acre (bpa). Therefore, recommendations regarding the marketing quantity
made prior to harvest, are based on yields of 143.2 bpa. For example,
a recommendation to forward contract 20 percent of expected 1998 production
translates into a recommendation to contract 28.6 bpa (20 percent of 143.2).
The actual reported corn yield in central Illinois in 1998 is 149.0 bpa.
The same approach is used for soybean evaluations. The calculated 1998
trend yield for soybeans in central Illinois is 47.0 bpa, and the actual
yield in 1998 is 49.0 bpa.
It is assumed that
after harvest begins producers have a reasonable idea of what their actual
realized yield will be. Since harvest occurs at different dates each year,
estimates of harvest progress as reported by NASS in central Illinois
are used. Harvest progress estimates typically are not made available
soon enough to identify precisely the beginning of harvest, so an estimate
is made based upon available data. Specifically, the date on which 50
percent of the crop is harvested is defined as the "mid-point"
of harvest. The entire harvest period then is defined as a five-week window,
beginning two and one-half weeks before the harvest mid-point, and ending
two and one-half weeks after the harvest mid-point. In most years, a five-week
window will include at least 80 percent of the harvest.
For 1998, the harvest
period for corn is defined as September 23, 1998 through October 28, 1998.
For soybeans, the harvest period is September 17, 1998 through October
22, 1998. Therefore, for corn, recommendations made after September 22
are applied on the basis of the actual yield of 149.0 bpa. For soybeans,
recommendations made after September 16 are applied on the basis of the
actual yield of 49.0 bpa.
The issue of changing
yield expectations typically is not dealt with in the recommendations
of the advisory programs. For the purpose of this study, the actual harvest
yield must exactly equal total cash sales of the crop at the end of the
marketing time frame. Hence, an adjustment in yield assumptions from expected
to actual levels must be applied to cash transactions at some point in
time. In this analysis, an adjustment is made in the amount of the first
cash sale made after the beginning of the harvest period. For example,
if a program advises forward contracting 50 percent of the corn crop prior
to harvest, this translates into sales of 71.6 bpa (50 percent of 143.2).
However, when the actual yield is applied to the analysis, sales-to-date
of 71.6 bpa imply that only 48.1 percent of the actual crop has been contracted.
In order to compensate, the amount of the next cash sale is adjusted to
align the amount sold. In this example, if the next cash sale recommendation
is for a 10 percent increment of the 1998 crop, making the total recommended
sales 60 percent of the crop, the recommendation is adjusted to 11.95
percent of the actual yield (17.8 bushels), so that the total crop sold
to date is 60 percent of 149.0 bushels per acre (71.6+17.8=89.4=0.6*149.0).
After this initial adjustment, subsequent recommendations are taken as
percentages of the 149.0 bpa actual yield, so that sales of 100 percent
of the crop equal sales of 149.0 bpa.
While the amount
of cash sales is adjusted to reflect the change in yield information,
a similar adjustment is not made for futures or options positions that
are already in place. For example, assume that a short futures hedge is
placed in the December 1998 corn contract for 25 percent of the 1998 crop
prior to harvest. Since the amount hedged is based on the trend yield
assumption of 143.2 bpa, the futures position is 35.8 bpa (25 percent
of 143.2). After the yield assumption is changed, this amount represents
a short hedge of 24.03 percent (35.8/149.0). The amount of the futures
position is not adjusted to move the position to 25 percent of the new
yield figure. However, any futures (or options) positions recommended
after the beginning of harvest are implemented as a percentage of the
Brokerage costs are
incurred when producers open or close positions in futures and options
markets. For the purposes of this study, it is assumed that brokerage
costs are $50 per contract for round-turn futures transactions, and $30
per contract to enter or exit an options position. Further, it is assumed
that CBOT corn and soybean futures are used, and the contract size for
each commodity is 5,000 bushels. Therefore, per-bushel brokerage costs
are 1 cent per bushel for a round-turn futures transaction and 0.6 cents
per bushel for each options transaction.
LDP and Marketing
Assistance Loan Payments
While the 1996 "Freedom-to-Farm"
Act did away with government set-aside and target price programs, price
protection for producers in program crops such as corn and soybeans was
not eliminated entirely. Minimum prices are established through a "loan"
program.  Specifically,
if market prices are below the Commodity Credit Corporation (CCC) loan
rate for corn or soybeans, producers can receive payments from the US
government that make up the difference between the loan rate and the lower
market price. There is considerable flexibility in the way the loan program
can be implemented by producers. This flexibility presents the opportunity
for advisory programs to make specific recommendations for the implementation
of the loan program. Additionally, the prices of both corn and soybeans
were below the loan rate during significant periods of time in the 1998-1999
marketing year, so that use of the loan program was an important part
of marketing strategies. As a result, net advisory program prices may
be substantially impacted by the way the provisions of the loan program
Most of the advisory
programs tracked by the AgMAS project for the 1998 crop make specific
recommendations regarding the timing and method of implementing the loan
program for the entire corn and soybean crops
These recommendations are implemented as given wherever feasible. Several
decision rules have to be developed even in this case, in particular,
for pre-harvest forward contracts. For a few programs, loan recommendations
are incomplete or not made at all. For these cases, it is necessary to
develop a more complete set of decision rules for implementing the loan
program in the marketing of corn and soybeans. All loan-related decision
rules are based on the assumption of a "prudent" or "rational" producer,
within the context of the intent of the loan program. More specifically,
it is assumed that a producer will take advantage of the price protection
offered by the loan program, even in the absence of specific advice from
an advisory program.
the decision rules, it is useful to provide a brief overview of the loan
program mechanics. Then, the rules developed to implement the loan program
in the absence of specific recommendations can be described more effectively.
There are two mechanisms
for implementing the price protection benefits of the loan program. The
first mechanism is the loan deficiency payment (LDP) program. LDPs are
computed as the difference between the loan rate for a given county and
the posted county price (PCP) for a particular day. PCPs are computed
by the USDA and change each day in order to reflect the "average" market
price that exists in the county. For example, if the county loan rate
for corn is $2.00 per bushel and the PCP for a given day is $1.50 per
bushel, then the next day LDP is $0.50 per bushel. If the PCP increases
the next day to $1.60 per bushel, the next day LDP will decrease to $0.40
per bushel. Conversely, if the PCP decreases the next day to $1.40 per
bushel, the next day LDP will increase to $0.60 per bushel.
LDPs are made available
to producers over the period beginning with corn or soybean harvest and
ending May 31st of the calendar year following harvest. Producers
have flexibility with regard to taking the LDP. They may simply elect
to take the payment when the crop is sold in a spot market transaction
(before the end of May in the particular marketing year). Or, producers
can choose to take the LDP before the crop is delivered and sold. Note
that LDPs for the 1998 crop cannot be taken after a crop has been delivered
and title has changed hands.
second mechanism is the nonrecourse marketing assistance loan program.
A loan cannot be taken on any portion of the crop for which an LDP has
been received. Under this program, producers may store the crop (on the
farm or commercially), maintain beneficial interest, and receive a loan
from the CCC using the stored crop as collateral. The loan rate is the
established rate in the county where the crop is stored and the interest
rate is established at the time of loan entry. Corn and soybean crops
can be placed under loan anytime after the crop is stored through May
31st of the following calendar year. The loan matures on the
last day of the ninth month following the month in which the loan was
Producers may settle
outstanding loans in two ways: i) repaying the loan during the 9-month
loan period, or ii) forfeiting the crop to the CCC at maturity of the
loan. Under the first alternative, the loan repayment rate is the lower
of the county loan rate plus accrued interest or the marketing loan repayment
rate, which is the PCP. If the PCP is below the county loan rate, the
economic incentive is to repay the loan at the posted county price. The
difference between the loan rate and the repayment rate is a marketing
loan gain (MLG). If the PCP is higher than the loan rate, but lower than
the loan rate plus accrued interest, the incentive is also to repay the
loan at the PCP. Interest is charged on the difference between the PCP
and the loan rate. If the PCP is higher than the loan rate plus accrued
interest, the incentive is to repay the loan at the loan rate plus interest.
Under the second
alternative, the producer stores the crop to loan maturity and then transfers
title to the CCC. The producer retains the proceeds from the initial loan.
This was generally not an attractive alternative in the 1998 marketing
year since the PCP was often below the cash price of corn and soybeans.
Repaying the loan at the PCP and selling the crop at the higher cash price
was economically superior to forfeiture.
The nonrecourse loan
program establishes the county loan rate as a minimum price for the producer,
as does the LDP program. For the 1998 crop, the sum of LDPs plus marketing
loan gains was subject to a payment limitation of $75,000 per person.
Forfeiture on the loans provided the mechanism for receiving a minimum
of the loan rate on bushels in excess of the payment limitation.
The average loan
rates for the 1998 corn and soybean crops across the eleven counties in
the Central Illinois Crop Reporting District (DeWitt, Logan, McLean, Macon,
Marshall, Mason, Menard, Peoria, Stark, Tazewell, and Woodford) are $1.95
and $5.42 per bushel, respectively. Market prices fell below these loan
rates for extended periods of time during the 1998 marketing year. This
is reflected in Figure 2, which shows the
corn and soybean LDP or MLG rates for central Illinois during the 1998
 For corn, LDPs
or MLGs are relatively high during harvest, varying from 10 cents to 30
cents per bushel, and then fall to zero or near zero during winter and
spring. As cash corn prices fell during the summer of 1999, corn marketing
loan gains increased rapidly and remained at relatively high levels. Soybean
LDPs or marketing loan gains generally moved upwards over the course of
the 1998 marketing year, starting at about 40 cents per bushel during
harvest and peaking at $1.60 per bushel during the following summer.
Decision Rules for
Programs with a Complete Set of Loan Recommendations
an advisory program makes a complete set of loan recommendations, the
specific advice is implemented wherever feasible. However, specific decision
rules are still needed regarding pre-harvest forward contracts because
it is possible for an advisory program to recommend taking the LDP on
those sales before it is actually harvested and available for delivery
in central Illinois. To begin, it is assumed that amounts sold for harvest
delivery with pre-harvest forward contracts are delivered first during
harvest. Since LDPs must be taken when title to the grain changes hands,
LDPs are assigned as these "forward contract" quantities are harvested
and delivered. This necessitates assumptions regarding the timing and
speed of harvest. Earlier it was noted that a five-week harvest window
is used to define harvest. This window is centered on the day nearest
to the mid-point of harvest progress as reported by NASS. Various assumptions
could be implemented regarding harvest progress during this window. Lacking
more precise data, a reasonable assumption is that harvest progress for
an individual, representative farm is a linear function of time.
1 and 2 summarize the information used to assign LDPs to pre-harvest
forward contracts. The second column shows the amount harvested assuming
a linear model. The third column shows the LDP available on each date
of the harvest window and the third column presents the average LDP through
each harvest date. An example will help illustrate use of the tables.
Assume that an advisory program recommends, at some point before harvest,
that a producer forward contract 50 percent of expected soybean production.
This translates into 23.5 bpa when the percentage is applied to expected
production (0.50 X 47.0 = 23.5). Next, convert the bpa to a percentage
of actual production, which is 48 percent (23.5/ 49.0 = 48). To determine
the LDP payment on the 48 percent of actual production forward contracted,
simply read down Table 2 to 10/02/98, which
is the date when 48 percent of harvest is assumed to be complete. The
average LDP up to that date (09/17/98-10/02/98) is $0.48 per bushel. This
is the LDP amount assigned to the forward contract bushels.
that LDPs for any sales (spot, forward contracts, futures or options)
recommended during harvest are taken only after all forward contract obligations
are fulfilled. In addition, crops placed under loan by an advisory program
do not accumulate interest opportunity costs because proceeds from the
loan can be used to offset interest costs that otherwise would accumulate.
Decision Rules for
Programs with a Partial Set of Loan Recommendations or No Loan Recommendations
an advisory program makes a partial set of loan recommendations, the available
advice is implemented wherever feasible. In the absence of specific recommendations,
it is assumed that crops priced before May 31, 1999 are not placed under
loan. Those crops receive program benefits through LDPs. After May 31,
1999, eligible crops (unpriced crops for which program benefits have not
yet been collected) are assumed to be under loan until priced.
In the absence of specific recommendations, rules for assigning LDPs and
MLGs are developed under the assumption that loan benefits are established
when the crop is priced or as soon after pricing that is allowed under
the rules of the program. This principle is consistent with the intent
of the loan program to fix a minimum price when pricing decisions are
made. Two rules are most important in the implementation of this principle.
First, LDPs on pre-harvest sales (forward contracts, futures or options)
are established as the crop is harvested. Second, if the LDP or MLG is
zero on the pricing date, or the first date of eligibility to receive
a loan benefit, those values are assigned on the first date when a positive
value is observed, assuming a beneficial interest in that portion of the
crop has been maintained. Specific rules for particular marketing tools
and situations follow:
Pre-harvest forward contracts. The same decision rules are
applied as discussed in the previous section. Specifically, it is assumed
that amounts sold for harvest delivery with pre-harvest forward contracts
are delivered first during harvest. LDPs, if positive, are assigned as
these "forward contract" quantities are harvested and delivered. This
necessitates assumptions regarding the timing and speed of harvest. A
linear model of harvest progress is assumed in the five-week harvest window.
The specific information used to assign LDPs to pre-harvest forward contracts
is again found in Tables 1 and 2. As a final
point, note that LDPs for any other sales (spot, futures or options) recommended
during harvest are taken only after all pre-harvest forward pricing obligations
Pre-harvest put option purchases. Long put option positions, which
establish a minimum futures
price, are treated in the same manner as pre-harvest short futures.
Post-harvest forward contracts. The main issue with respect
to post-harvest forward contracts is when to assign the LDPs or MLGs.
Those can be established on the date the contract is initiated, on the
delivery date of the contract, or anytime in between. Following the general
principle outlined earlier, LDPs and MLGs for post-harvest contracts are
assigned on the date the contract is initiated or the first day with positive
benefits prior to delivery on the contract.
Post-harvest short futures. As with post-harvest forward contracts,
the main issue with post-harvest short futures positions is when to assign
loan benefits. These are assigned when the short futures position is initiated
or as soon as a positive benefit is available if the futures position
is still in place and cash sales have not been made. If the underlying
crop is sold before a positive LDP is available, that portion of the crop
receives a zero LDP. If the short futures position is offset before a
positive LDP is available and the cash crop has not yet been sold, that
portion of the crop is eligible for loan benefits on the next pricing
Post-harvest long put positions. Long put option positions established
after the crop is harvested are treated in the same manner as post-harvest
Spot sales before May 31, 1999. If a spot cash sale of corn or soybeans
is recommended before May 31, 1999, it is assumed that the LDP, if positive,
is established that same day.
Loan program after May 31, 1999. Since LDPs are not available after
May 31, 1999, it is assumed that any corn or soybeans in storage and not
priced as of this date, for which loan benefits have not been established,
are entered in the loan program on that date. This is a reasonable assumption
since spot prices are below the loan rate for both corn and soybeans in
central Illinois on May 31 and a prudent producer would take advantage
of the price protection offered by the loan program. When the crops are
subsequently priced (cash sale, forward contract, short futures, or long
put option), the marketing loan gain, if positive, is assigned on that
day. Forfeiture is not an issue for these bushels because all cash sales
were made before the end of nine-month loan period (February 28, 2000).
Note also that the $75,000 payment limitation is not considered in the
analysis, as production is based on one acre of corn and/or soybeans.
An important element
in assessing returns to an advisory program is the economic cost associated
with storing grain instead of selling grain immediately at harvest. The
cost of storing grain after harvest (carrying costs) consists of two components:
physical storage charges and the opportunity cost incurred by foregoing
sales when the crop is harvested. Physical storage charges can apply to
off-farm (commercial) storage, on-farm storage, or some combination of
the two. Opportunity cost is the same regardless of the type of physical
the purposes of this study, it is assumed that all storage occurs off-farm
at commercial sites. This is assumed
for several reasons. First, commercial storage costs reflect the full
economic costs of physical storage, whereas on-farm storage cost estimates
may not, due to differing accounting methods and/or time horizons. Second,
commercial storage costs are relatively consistent across producers in
a given area, whereas on-farm storage costs likely vary substantially
among producers. Third, commercial storage cost data are readily available,
whereas this is not the case for on-farm storage.
Storage charges are
assigned beginning October 29 for corn and October 23 for soybeans, the
first dates after the end of the respective harvest windows. Physical
storage charges are assumed to be a flat 13 cents per bushel from the
end of harvest through December 31. After January 1, physical storage
charges are assumed to be 2 cents per month (per bushel), with this charge
pro-rated to the day when the cash sale is made. The storage costs represent
the typical storage charges for the 1998 crop quoted in a telephone survey
of nine central Illinois elevators.
The interest rate
is assumed to be 8.6 percent per year, and is applied to the average harvest-time
price for each crop. This interest rate is the average rate for all commercial
agricultural loans for the fourth quarter of 1998 and the first three
quarters of 1999 as reported in the Agricultural Finance Databook
published by the Board of Governors of the Federal Reserve Board. The
interest charge for storing grain is the interest rate compounded daily
from the end of harvest to the date of sale.
In addition to the
storage and interest costs, another charge is assigned to corn (but not
soybeans) that goes into commercial storage. This charge, referred to
as a "shrink charge," is commonly deducted by commercial elevators on
"dry" corn that is delivered to the elevator to be stored, and reflects
a charge for drying and volume reduction (shrinkage) which occurs in drying
the corn from (typically) 15 percent to 14 percent moisture. The charge
for drying is a flat 2 cents per bushel, while the charge for volume reduction
is 1.3 percent per bushel. Given that the harvest-time cash price in central
Illinois for 1998 is $1.91 per bushel, the charge for volume reduction
is 2.5 cents per bushel ($1.91 * 0.013). Therefore, the flat shrink charge
assigned to all stored corn is 4.5 cents per bushel.
It should be noted
that the cost of drying corn down to 15 percent moisture and the cost
of drying soybeans to storable moisture are not included in the calculations.
This cost is incurred whether or not the grain is stored or sold at harvest,
or whether the grain is stored on-farm or off-farm.
calculation of carrying charges may be impacted by an advisory program,s
loan recommendations and/or the decision rules discussed in the previous
section. Specifically, during the period corn or soybeans are placed under
loan, interest costs are not accumulated, as the proceeds from the loan
can be used to offset interest opportunity costs that otherwise would
accumulate. This most commonly occurs after May 31, 1999, when it is assumed
that all unpriced grain is placed under loan until priced. If a crop is
priced (forward contracts, futures or options) while under loan but stored
beyond the time of pricing, interest opportunity costs are accumulated
from the day of pricing until the time storage ceases (since it is assumed
the loan is repaid on the date of pricing).
it could be argued that interest opportunity costs should be charged based
on the LDP available at harvest but not taken by an advisory program.
This adjustment is not made for two reasons. First, it would not substantially
impact the results due to the small interest opportunity costs involved.
Second, anecdotal evidence suggests that there was considerable delay
in LDP payments actually reaching producers, with lags of several months
apparently not uncommon.
In addition to comparing
the net price received across advisory programs, it is useful to compare
the results to simple market benchmark prices. These prices are intended
to provide information about the actual prices that are available for
a particular crop, and provide an indication of how producers might fare
using some basic marketing strategies that do not require professional
Conceptually, a useful
benchmark should: i) be simple to understand and to calculate;
ii) represent the returns to a marketing strategy that could be implemented
by producers; iii) be directly comparable to the net advisory price
received from following the recommendations of a market advisory program;
iv) not be a function of the actual recommendations of the advisory programs
or of the actual marketing behavior of producers, but rather should be
external to their marketing activities; and v) be stable,
so that it represents the range of prices made available by the market
throughout the marketing period instead of representing the price during
a small segment of the marketing period.
In the 1995 and 1996
AgMAS corn and soybean pricing performance reports, two market benchmark
prices are reported: the average harvest-period price in central Illinois
and the average price received by Illinois producers (as reported by USDA).
However, research conducted by the AgMAS Project indicates that these
benchmarks have some weaknesses that make them less than ideal indicators
of the price offered by the market for a given crop.
The harvest cash price only includes prices during a small portion of
the entire period over which the crop could be marketed. In certain years,
this price may not fairly represent the true range of prices available.
The calculation of the harvest cash price also can be sensitive to the
specific time period selected as the harvest period. The average price
received by Illinois producers is not directly comparable to the net advisory
price as calculated in this study because the average price received includes
price discounts that are incurred because some grain marketed is of substandard
quality, while the AgMAS Project assumes that all grain marketed meets
the requirements of No. 2 yellow corn or No. 1 soybeans.
In the 1997 AgMAS
corn and soybean pricing performance report, a new market benchmark price
is introduced: the average cash price stated on a harvest equivalent basis
for corn and soybeans over the entire marketing period. For the 1998 crop,
the benchmark is based on the average price over the 1998 marketing period,
which began on September 1, 1997 and ended on August 31, 1999. Cash forward
prices for central Illinois are used during the 1998 pre-harvest period,
while daily spot prices for central Illinois are used for the 1998 post-harvest
period. The same forward and spot price series applied to advisory program
recommendations are used to construct the benchmark. Details on the forward
and cash price series can be found in the earlier "Prices" section of
The average cash
price benchmark meets all of the selection criteria listed above, except
it cannot be easily implemented by producers since it involves marketing
a small portion of each crop every day of the two-year marketing window.
It can be shown, though, that the price realized via a more manageable
strategy of routinely selling twelve times during the marketing window
very closely approximates the average cash price. Therefore, it is determined
that the average cash price meets all five selection criteria and is the
most appropriate market benchmark to be used in evaluating the pricing
performance of market advisory programs.
are made to the daily cash prices to make the average cash price benchmark
consistent with the calculated net advisory prices for each marketing
program. The first is to take a weighted average price, to account for
changing yield expectations, instead of taking the simple average of the
daily prices. This adjustment is consistent with the procedure described
previously in the "Expected Yield" section. The daily weighting
factors for pre-harvest prices are based on the calculated trend yield,
while the weighting of the post-harvest prices is based on the actual
reported yield for central Illinois. The second adjustment is to compute
post-harvest cash prices on a harvest equivalent basis, which is done
by subtracting carrying charges (storage, interest and shrink) from post-harvest
spot cash prices. The daily carrying charges are calculated in the same
manner as those for net advisory prices.
A third adjustment
to the average cash price benchmark is new with the 1998 report. In the
context of evaluating advisory program recommendations, it was argued
earlier that a "prudent" or "rational" producer will take advantage of
the price protection offered by the loan program, even in the absence
of specific advice from an advisory program. This same logic suggests
that a "prudent" or "rational" producer will take advantage of the price
protection offered by the loan program when following the benchmark average
price strategy. Based on this argument, the average cash price benchmark
is adjusted by the addition of LDPs and MLGs. Bushels marketed in the
pre-harvest period according to the benchmark strategy (approximately
53 percent) are treated as forward contracts with the LDPs assigned at
harvest. Bushels marketed each day in the post-harvest period (approximately
47 percent) are awarded the LDP or MLG in existence for that particular
day. Finally, just as in the case with comparable advisory program recommendations,
interest opportunity costs are not charged to the benchmark after May
31, 1999 to reflect the assumption that stored grain is placed under loan.
1998 Pricing Performance
Results for the Advisory Programs
results for the 1998 corn and soybean crops are presented in Tables
3 through 5 and Figures 3 and 4. For
a specific example of how the marketing recommendations are translated
into a final net advisory price that incorporates the aforementioned parameters,
please refer to the 1996 AgMAS Pricing Report.
results of the evaluation of corn marketing programs are contained in
Table 3. This table shows the breakout of
the components of the net advisory price as well as the net advisory price
itself. The 1998 average net advisory price for all 23 corn programs is
$2.17 per bushel. It is computed as the unadjusted cash sales price ($2.15
per bushel) minus carrying charges ($0.19 per bushel) plus futures and
options gain ($0.04 per bushel) minus brokerage costs ($0.02 per bushel)
plus LDP/MLG gain ($0.18 per bushel). The average
net advisory price for corn is seven cents below the market benchmark
price. The range of net advisory prices for corn is fairly large, with
a minimum of $1.93 per bushel and a maximum of $2.51 per bushel.
4 lists the program-by-program results of the soybean evaluations.
The1998 average net advisory price for all 22 soybean programs is $5.82
per bushel. It is computed as the unadjusted cash sales price ($5.42 per
bushel) minus carrying charges ($0.19 per bushel) plus futures and options
gain ($0.12 per bushel) minus brokerage costs ($0.01 per bushel) plus
LDP/MLG gain ($0.49 per bushel). The average net advisory price for soybeans
is four cents per bushel below the market benchmark price. As with corn,
the range of net advisory prices for soybeans is substantial, with a minimum
of $5.11 per bushel and a maximum of $6.58 per bushel.
A point to consider
when examining Tables 3 and 4 is the impact
of the assumption that all storage occurs off-farm. It is possible to
argue that short-run marginal costs of on-farm grain storage is zero if
the facilities already exist and variable costs associated with handling
grain and maintaining grain quality are not included. Excluding the costs
of commercial storage entirely (but continuing to subtract interest costs),
the average net advisory price for corn increases to $2.32 per bushel
and the net advisory price for soybeans increases to $5.92 per bushel. The calculation
of the market benchmark price also is impacted by such a change in the
storage cost assumption, with the market benchmark price rising to $2.35
per bushel for corn and $5.95 per bushel for soybeans. Therefore, if physical
storage charges are assumed to be zero, the average net advisory price
for both corn and soybeans is three cents below the market benchmark price,
Hence, there is only a minimal impact of changing storage assumptions
on the pricing results.
Since many Corn Belt
producers grow both corn and soybeans, it also is useful to examine a
combination of the results for the corn and soybean marketing programs.
In order to do this, gross revenue is calculated for a central Illinois
producer who follows both the corn and soybean marketing advice of a given
program. It is assumed that the representative producer splits production
equally (50/50) between corn and soybeans and achieves corn and soybean
yields equal to the actual yield for the area in 1998. The 50/50 advisory
revenues are computed on a per acre basis and compared with the revenue
a central Illinois producer could have received based on the market benchmark
price for both corn and soybeans. Advisory revenue per acre is calculated
only for those programs that offer both corn and soybean marketing advice.
5 lists the program-by-program results of the 50/50 revenue analysis.
The average revenue achieved by following both the corn and soybean programs
offered by an advisory program is $304 per acre, $6 per acre less than
market benchmark revenue for 1998 marketing period. The spread in advisory
revenue also is noteworthy, with the difference between the bottom- and
top-performing advisory programs nearly reaching $60 per acre.
For comparison purposes,
the annual subscription cost of each advisory program also is listed in
Table 5. Subscription costs average $295
per program, about equal to the average advisory revenue for one acre
of production, split 50/50 between corn and soybeans. Subscription costs
do not appear to be large relative to total farm revenue, whether a large
or small farm is considered. For a 1,000 acre farm, subscription costs
average about one-tenth of one percent of total advisory revenue. For
a 250 acre farm, subscription costs average about three-tenths of one
percent of total advisory revenue. Note that subscription costs are not
subtracted from any of the revenue figures presented in Table
of the net advisory prices is illustrated in Figure
3. Of the 23 marketing programs for corn, 7 programs achieved a net
price that is within (plus or minus) 5 cents of the market benchmark price
of $2.24 per bushel. Three of the advisory programs achieve a net price
6 to 16 cents higher than the market benchmark price, and one program
achieves a net price of more than 16 cents above the market benchmark.
Eleven programs are grouped in a range between 6 and 27 cents below the
market benchmark price, with one program more than 27 cents below the
For soybeans, ten
of the advisory programs are within (plus or minus) 15 cents per bushel
of the market benchmark price of $5.86 per bushel. Three of the advisory
programs achieve a net price between 16 to 46 cents higher than the market
benchmark price, and two programs achieve a net price of more than 46
cents above the market benchmark. Five programs are grouped in a range
between 16 and 46 cents below the market benchmark price, with two programs
more than 46 cents below the market benchmark.
In terms of revenue,
4 of the 22 programs achieve revenue per acre within (plus or minus) $5
per acre of the market benchmark revenue. Three programs achieve revenue
that is between $6 and $16 per acre above the market benchmark revenue,
while an additional three programs achieve revenue more than $16 above
the market benchmark revenue. Ten programs achieve revenue that is between
$6 and $26 per acre below market benchmark revenue. Three programs generate
revenue that is more than $26 per acre less than benchmark revenue.
Another view of the
pricing performance of the advisory programs is shown in Figure
4. Here, net advisory prices or revenues are ranked from highest to
lowest and plotted versus the market benchmark. As shown in the top chart,
7 of the 23 corn marketing programs achieve a net price that is equal
to or higher than the market benchmark price. As reported in the middle
chart, 7 of the 22 soybean programs achieve a net advisory price equal
to or higher than the market benchmark price. The bottom chart shows the
comparison between 50/50 advisory revenue and the revenue implied by market
benchmark prices. Advisory revenue is greater than the market benchmark
revenue for seven of the programs. Note that the same advisory programs
do not necessarily exceed the market benchmarks in each of the comparisons
in Figure 4.
5 shows the pattern of corn prices for the 1998 marketing window.
The top chart shows daily cash prices from September 2, 1997 through August
31, 1999. The pre-harvest prices are the forward contract prices for harvest
delivery. The middle chart is a repeat of the top chart with daily loan
deficiency (LDP) or marketing loan gains (MLG) added to the daily price.
For the pre-harvest period, the LDP is the average LDP available at harvest
time. The third chart offers a different perspective, in that during the
post-harvest period the daily cash price is adjusted for cumulative carrying
costs (shrink, interest, and storage charges). The chart illustrates the
pattern of harvest equivalent prices plus LDP or MLG.
Prices for the 1998/99
crop were highest in the pre-harvest period, with the cash forward contract
price remaining above $2.50 per bushel until April 1998. Prices declined
sharply into harvest as a large crop materialized, made a classic post-harvest
recovery as the basis appreciated, and then remained stable during the
winter and spring of 1999. New lows were made in the summer of 1999 on
the basis of the prospects for another large harvest. The price pattern
was typical for a large crop year followed by another large crop.
LDPs were positive
at harvest time, but cash prices moved above the Commodity Credit Corporation
(CCC) loan rate in the winter and early spring months. Marketing loan
gains were large in July. When adjusted for carrying costs, prices declined
slightly during the winter and spring and moved to extremely low levels
in July 1999. The price pattern for the 1998 crop favored those who made
early pre-harvest sales and penalized those who stored a large portion
of the crop unpriced late into the marketing year.
6 shows the pattern of soybean prices for the 1998 marketing window.
The three charts are the same as for corn, depicting daily cash prices,
cash prices plus LDP/MLG, and cash prices plus LDP/MLG minus carrying
Soybean prices for
the 1998 crop followed a pattern similar to that for corn. Pre-harvest
forward contract prices were generally above $6.00 per bushel until May
1998. Prices declined into harvest, managed a modest post-harvest recovery,
and then declined sharply into the last part of the marketing window.
The post-harvest rally was associated with a brief period of concern about
the South American crop and a typical post-harvest strengthening of the
basis. The South American crop turned out to be large and US producers
planted record soybean acreage in the spring of 1999. The 1999 harvest
was the third consecutive large harvest in the US. Like corn prices, the
pattern of soybean prices was classic for a large crop year followed by
another large crop. LDPs were positive at harvest time. Cash prices moved
above the loan rate for a brief period following harvest and then LDP/MLGs
became large in the spring and summer of 1999.
The 1998/1999 price
pattern for soybeans favored those who made sales prior to planting and
penalized those who stored the crop unpriced late into the marketing year.
The penalty was especially large for those who established the LDP at
harvest and stored the crop unpriced into the spring or summer of 1999.
Performance Results for the Advisory Programs
A summary of the
results of the pricing performance evaluations for the 1995, 1996, 1997
and 1998 corn and soybean marketing periods is contained in Tables
6 through 8 and Figures 7 through 9. The results for the 1995, 1996
and 1997 marketing periods are those contained in the 1997 AgMAS Corn
and Soybean Pricing Report. Tables
6 through 8 present pricing results for each year along with two-year
averages (1997-1998), three-year averages (1996-1998) and four-year averages
(1995-1998). Some marketing programs
are not included in all of the averages. For example, four-year averages
are calculated only for the 19 marketing programs that were evaluated
for all four years. The following discussion focuses on the four-year
average results, as this is the longest time period.
As shown in Table
6, the average net advisory corn price over the four years for the
19 programs is $2.52 per bushel, one cent below the four-year market benchmark
price of $2.53 per bushels. The results range from a low of $2.36 to a
high of $2.82 per bushel.
The four-year results
for soybeans are listed in Table 7. The
average net advisory soybean price over the four years is $6.50 per bushel,
12 cents above the four-year market benchmark price of $6.38 per bushel.
The results range from a low of $6.31 to a high of $6.88 per bushel.
The four-year results
for advisory revenue are presented in Table
8. The average advisory revenue for the four years is $325 per acre.
This is $2 per acre higher than the four-year market benchmark revenue.
The results range from a low of $311 to a high of $349 per acre.
As shown in the top
chart in Figure 9, 10 of the 19 corn marketing
programs achieve a four-year average net advisory price that is above
the four-year average market benchmark price of $2.53 per bushel. The
middle chart in Figure 9 shows that 13 of
the 19 soybean programs achieve a four-year average price that is above
the four-year average market benchmark price of $6.38 per bushel.
The bottom chart
in Figure 9 shows the comparison of the
four-year average advisory revenue versus the four-year average revenue
implied by the market benchmark price. Ten of the 19 advisory programs
achieve a four-year average revenue that is above average market benchmark
revenue of $323 per acre.
A First Look at Pricing
Performance and Risk of the Advisory Program
advisory program,s net price received is an important indicator of performance.
However, pricing performance almost certainly is not the only relevant
indicator. For example, two advisory programs may generate the same average
net price across marketing periods, but the risk of the programs may differ
substantially. The difference in risk may be the result of: i) type of
recommended pricing tool (cash, forward, futures, options, etc.), ii)
timing of sales, and iii) implementation of marketing strategies.
In order to quantify
the risk of advisory programs, a definition of risk must be developed.
Risk is usually thought of as the possibility or probability of loss.
A natural extension of this idea looks at risk as the chance producers
will fail to achieve the net price they expect based on following an advisory
program. This approach to quantifying risk does not measure the possibility
of loss alone. Risk is seen as uncertainty ^ the likelihood that what
is expected will fail to happen, whether the outcome is better or worse
than expected. So an unexpected return on the upside or the downside ^
a net price of $2.50 or $1.50 per bushel when a net price of $2.00 per
bushel is expected ^ counts in determining the "risk" of an advisory program.
Thus, an advisory program whose net price does not depart much from its
expected, or average, net price is said to carry little risk. In contrast,
an advisory program whose net price is quite volatile from year-to-year,
often departing from expected net price, is said to be quite risky.
This approach to
defining risk can be quantified by using a statistical measure called
the standard deviation
It measures the dispersion of year-to-year net advisory prices from the
average net price. One can think of the standard deviation as the "typical"
variation in net price from year-to-year. The larger the standard deviation
of an advisory program, the less likely a producer is to get exactly the
net price expected, though it is possible by chance to get a higher price
instead of a lower one for any particular time period.
of market advisory pricing performance and risk will provide valuable
information to producers. However, as economic theories of decision-making
under risk highlight, it is the tradeoff between pricing performance and
risk that is likely to be of greatest interest to producers. Theory suggests that above-average pricing performance should
be possible only if marketing strategies are recommended that have above-average
risk (and vice versa). Faced with such a choice set, producers
will choose an advisory program that has a pricing-risk tradeoff that
is consistent with their risk preferences.
The basic data needed
for assessing the pricing-risk tradeoff of market advisory programs is
presented in Table 9. For each advisory
program tracked in all four years of AgMAS evaluations, the four-year
average net advisory price or revenue and standard deviation of net advisory
price or revenue is reported. The standard deviations indicate that the
risk of advisory programs varies substantially. In corn, the standard
deviations range from a low of $0.15 per bushel to a high of $0.85 per
bushel. The average standard deviation across the 19 corn programs is
$0.42 per bushel, which is higher than the $0.30 per bushel standard deviation
of the corn market benchmark. In soybeans, the standard deviations range
from a low of $0.33 per bushel to a high of $0.94 per bushel. The average
standard deviation across the 19 soybean programs is $0.67 per bushel,
which also is higher than the $0.52 per bushel standard deviation of the
soybean market benchmark. Finally, revenue standard deviations for the
19 programs range from a low of $22 per acre to a high of $52 per acre.
The average revenue standard deviation across the 19 programs is $36 per
bushel, higher than the $30 per acre standard deviation of the market
The estimated relationship
between pricing performance and risk for corn is presented in Figure
10. As economic theory predicts, there is a positive tradeoff between
the average price and standard deviation; securing a higher net corn price
generally requires that an advisory program take on more risk, and vice
versa. The strength of the relationship is measured by the correlation
coefficient, which can take on values between ^1 and +1. A negative value
means that net price and standard deviation tend to move in opposite directions,
while a positive value means they tend to move in the same direction.
The closer a correlation coefficient is to ^1 or +1, the stronger the
tendency. Since the estimated correlation coefficient for corn is +0.65,
a modestly strong relationship is indicated.
The performance implications
of the tradeoff between corn pricing performance and risk is explored
in Figure 11. The chart is the same as in
Figure 10, except it is now divided into
four quadrants based on the average price and standard deviation of the
market benchmark. Advisory programs in the upper left quadrant have a
higher price and less risk than the benchmark, which is the most desirable
outcome from a producer,s perspective. Advisory programs in the lower
right quadrant have a lower price and more risk than the benchmark, which
is the least desirable outcome from a producer,s perspective. The two
remaining quadrants reflect a higher price and more risk than the market
benchmark or a lower price and less risk than the market benchmark. A
producer may prefer an advisory program to the market benchmark in either
of these two quadrants, but this depends on personal preference for risk
relative to return.
The data plotted
in Figure 11 show there is only one advisory
program in corn that generates a combination of net price and risk superior
to the market benchmark (upper left quadrant). In contrast, six advisory
programs in corn produce a combination that is inferior to the benchmark
(lower right quadrant). Only three programs have a lower price and less
risk than the benchmark, while nine programs have a higher price and more
The estimated relationship
between pricing performance and risk for soybeans is presented in Figure
12. Again, as economic theory predicts, there is a positive tradeoff
between the average price and standard deviation; achieving a higher soybean
net price generally requires that an advisory program take on more risk,
and vice versa. The estimated correlation coefficient for soybeans
is +0.27, indicating a weaker relationship than was found for corn.
The data plotted
in Figure 13 show there are only two advisory
programs in soybeans that generate a combination of net price and risk
superior to the market benchmark (upper left quadrant). Five advisory
programs in soybeans produce a combination that is inferior to the benchmark
(lower right quadrant). Only one program has a lower price and less risk
than the benchmark, while eleven programs have a higher price and more
The estimated relationship
between performance and risk for corn and soybean 50/50 revenue is presented
in Figure 14. Given the results for corn
and soybeans, it is not surprising that there is a positive tradeoff between
average revenue and standard deviation; producing higher revenue generally
requires that an advisory program take on more risk, and vice versa.
The estimated correlation coefficient for revenue is +0.63, indicating
a substantial relationship between average revenue and risk.
Based on 50/50 revenue,
the data plotted in Figure 15 show that
no advisory program generates a combination of average revenue and risk
superior to the market benchmark (upper left quadrant). Seven advisory
programs produce a revenue combination that is inferior to the benchmark
(lower right quadrant). Only two programs have lower revenue and less
risk than the benchmark, while ten programs have higher revenue and more
on financial investments suggests that return-risk results, like those
presented above, may be sensitive to alternative specifications of the
market benchmark. To investigate this issue, the pricing (or revenue)
performance and risk of market advisory programs is compared to a 20-month
average cash price benchmark in Figures 16 through
18. Compared to the 24-month benchmark, the 20-month benchmark simply
deletes the first four months of each marketing window from the computations
of the benchmark price. The change barely impacts the average benchmark
price or revenue for the four years of analysis. This is not surprising
given the nature of the average cash price benchmarks. In informationally
efficient markets, annual averages of different average cash price benchmarks
should be roughly similar when stated on a harvest equivalent basis. The
same logic does not necessarily carry over to the standard deviations
of the alternative benchmarks. In this case, standard deviations for the
20-month benchmark are substantially higher than those of the 24-month
benchmark. The higher standard deviations for the 20-month benchmark do
make sense, given that the 20-month benchmark includes less pre-harvest
forward contracting than the 24-month benchmark. It is interesting to
note that the risk of the 20-month benchmark approximately matches the
average risk of net advisory prices in corn, soybeans and 50/50 revenue.
The comparisons in
Figures 16 through 18 indicate that the
risk-return performance of market advisory programs is somewhat sensitive
to the change in market benchmarks. This is most notable for the upper
left performance quadrant, where advisory programs have higher prices
and less risk than the market benchmark. Five advisory programs generate
average corn prices and risk in the upper left quadrant based on the 20-month
benchmark, compared to only one with the 24-month benchmark. Six advisory
programs generate average soybeans prices and risk in the upper left quadrant
based on the 20-month benchmark, compared to only one with the 24-month
benchmark. Four advisory programs generate average 50/50 revenue and risk
in the upper left quadrant based on the 20-month benchmark, compared to
none with the 24-month benchmark.
While there is some
sensitivity of the return-risk results to alternative benchmarks, it is
important to emphasize that the basic findings are unchanged. Whether
a 24-month or 20-month benchmark is considered, about two-thirds of the
advisory programs generate average prices and risk in the higher price/more
risk or lower price/less risk quadrants. Hence, producing a higher average
price or revenue generally requires that an advisory program take on more
risk, and vice versa.
Overall, the results
presented in this section suggest performance analysis is markedly affected
by the inclusion of risk. As an example, consider the case of soybeans
using a 24-month benchmark. If only one dimension of performance is considered,
the average net advisory price over the four-year period, 13 of the 19
soybean programs "beat" the 24-month market benchmark. However, when two
dimensions of performance are considered, average price and standard deviation,
only two programs "beat" the 24-month market benchmark in soybeans. The
other 11 programs did not beat the market in a return-risk framework because
they took on more risk to generate higher average prices.
It is important to
emphasize at this point that the pricing and risk performance results
are based on only four observations. This is a small sample for estimating
the true risks of market advisory programs. Hence, the results presented
in this section should be viewed as exploratory rather than definitive.
Finally, the approach
to performance evaluation presented in this section opens the door to
a new type of analysis. Modern Portfolio Theory (MPT) shows how to combine
market advisory programs into "portfolios" that have the highest return
for a given level of risk. A "portfolio" might consist of 50 percent of
corn and soybeans marketed by advisory program X and 50 percent
marketed by advisory program Y. MPT produces "efficient portfolios"
by taking advantage of the diversification opportunities available through
combining advisory programs. In fact, it is possible that some portfolios
of advisory programs will generate higher prices and less risk than the
market benchmark (lie in the upper left quadrant of Figures
11, 13 or 15), even though the individual advisory programs that make
up the portfolio do not. The potential improvement in performance depends
on the degree to which net advisory prices do not tend to move
together. The application of MPT to market advisory services represents
an interesting area of future research for the AgMAS Project.
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