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Development of a Market Benchmark Price for AgMAS Performance Evaluations

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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 “benchmark” measure of the market price during a particular marketing time frame.

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 crop.

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 “spreading” 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.

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