This report was developed to evaluate the pricing performance of market advisory services in hogs over the 1995-2004 marketing years. Market advisory service performance and predictability of performance are measured. A minimum of eleven advisory programs were tracked each year over 1995-2004. The AgMAS Project subscribes to each of the services that are included and records recommendations in real-time, eliminating any hindsight bias.
Some explicit assumptions are made in order to produce consistent and comparable results across advisory programs. The assumptions are used to accurately depict marketing conditions faced by a representative Iowa/Minnesota hog producer. Some key assumptions are: i) the typical marketing window begins nine months prior to the beginning of the marketing quarter and ends at the end of the quarter (creating a twelve month window), ii) hogs are produced and sold on a consistent schedule, iii) producers do not face any production risk, iv) brokerage costs are subtracted for all futures and options transactions. Using these and other assumptions, the net price received by a producer following advice from a market advisory program is calculated for the 1995-2004 marketing years.
Three benchmarks are created to use in the performance evaluations. In this study, the first benchmark measures the average cash price offered during the marketing quarter. Another benchmark measures the average price offered over the entire marketing window, assuming an equal amount is sold each day. The final benchmark is based on the average marketing profiles of the advisory programs and hedges only 25% of production prior to the quarter.
The first indicator of market advisory program pricing performance is the proportion of program prices above the benchmarks. Results show that the advisory programs only beat the cash benchmark 34% of the time. They received a higher price than the index benchmark 62% of the time and the empirical benchmark 52% of the time. The second indicator examines the average price performance of the advisory programs. None of the programs had a significantly higher average price than the cash or the empirical benchmark. Only one program had a significantly higher average price than the index benchmark. The third indicator examines risk versus return of the programs. One program dominated the cash benchmark in terms of both risk and return. None of the programs dominated the index benchmark, while two programs dominated the empirical benchmark. Finally, predictability of program performance is examined. Several tests indicate a very limited amount of predictability.
Based on the results of this study, market advisory program performance in hogs is not significantly superior to the benchmarks. Performance was especially low when compared to the cash benchmark. Additionally, performance was even weaker when risk was included in the analysis.