Evaluation of Market Advisory Services
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DARREL GOOD
Professor in the Department of Agricultural
and Consumer Economics
Office: 421 Mumford Hall (UIUC)
Phone: (217) 333-4716
E-mail: d-good@illinois.edu |
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Grain producers operate in a highly uncertain economic environment,
as evidenced by the rollercoaster movement of corn and soybean prices
since 1995. As a result, price risk management plays an important role
in the overall management of the farm business. The use of private-sector
market advisory services has increased over time as the demand for risk
management advice has increased.
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 need to develop an ongoing "track record" of the
performance of these services.
In order to provide such a track record, the Agricultural Market Advisory
Service (AgMAS) Project was initiated in September 1994. To determine
the performance of selected market advisory services, the AgMAS Project
purchases a subscription to each service and records daily the marketing
advice given. At the end of the marketing year, the advice is summarized,
and the harvest equivalent price a producer would receive by following
the advice is calculated.
To be included in the study, an advisory service must be available electronically
and must give specific pricing recommendations. In order to depict "real
world" conditions and to provide consistent comparisons, four assumptions
are made in calculating the harvest equivalent price generated by the
advice: 1) the marketing year extends from September of the year prior
to harvest through August of the year following harvest; 2) cash prices
and yields are those available in central Illinois; 3) all storage is
assumed to occur off-farm; and 4) marketing loan recommendations are
followed whenever feasible.
The final set of recommendations attributed to each advisory service
represents the best efforts of the AgMAS Project staff to accurately
and fairly interpret the information made available by each service.
Given that some recommendations are subject to interpretation, the possibility
is acknowledged that the AgMAS track record recommendation for a given
service may differ from that stated by the advisory service, or from
that recorded by another subscriber.
In addition to comparing net prices across advisory programs, it is useful
to compare the results to simple market benchmark prices. The benchmark
used here is the average daily cash price over the two-year marketing
period, adjusted for storage costs and for marketing loan payments.
present
the pricing performance results for corn and soybeans for the 1999-2000
marketing year. The advisory service results are arranged from highest
to lowest price and compared to the benchmark price. There were 26 advisory
programs included for the 1999 crop. The average price for the 26 programs
was $2.02 per bushel, $.03 below the market benchmark price. The net
price was computed as an unadjusted cash sales price ($1.92) minus carrying
charges ($.16) plus futures and options gains ($.05) minus brokerage
costs ($.02) plus LDP ($.23). The range in advisory services prices was
from $1.66 to $2.49 per bushel.
There were 25 soybean advisory programs included in 1999. The average
price of $5.67 was $.17 above the benchmark price and was computed as
an unadjusted cash price ($4.74) minus carrying charges ($.17) plus futures
and options gains ($.22) minus brokerage costs ($.02) plus LDP ($.92).
The range of advisory service prices was from $4.68 to $7.10 per bushel.
present
the pricing performance results for corn and soybeans for the five crop
years from 1995 through 1999. There were 18 advisory programs tracked
for all five years. For corn, the average price for the 18 programs was
$2.42, about equal to the market benchmark price. The range in average
price was from $2.27 to $2.76 per bushel. Only seven programs had an
average price equal to or greater than the benchmark price. For soybeans,
the average price for the 18 programs was $6.32, $.12 above the average
benchmark price. The range in average price was from $5.99 to $6.79 per
bushel. Fourteen firms had an average price equal to or greater than
the benchmark price.
In addition to average price received by an advisory program, it is useful
to examine the riskiness of the outcomes for each service. The standard
deviation of annual outcomes measures the dispersion of year-to-year
net prices. The estimated relationship between pricing performance (average
price) and risk (standard deviation) is presented in. The performance of each service
relative to the benchmark is divided into four quadrants, depending on
whether the service received a price above or below the benchmark and
demonstrated more or less risk than the benchmark. For corn, only one
firm achieved a higher price and demonstrated less risk than the benchmark.
For soybeans, four firms were able to achieve a higher price with less
risk.
In addition to pricing performance of an advisory service, the "marketing
style" of a service may be important to a producer. Style has been
measured by examining the cumulative percent of the crop that has been
sold each day of the two-year marketing period. Considerable variation in style is apparent among the advisory
services.
Finally, the consistency of predictability of advisory service performance
from year to year is also important. Is performance in one year correlated
to performance the following year or two years out? Analysis based on
five years of data suggests a modest amount of correlation, most of which
has occurred the past three years.
In conclusion, market advisory services have shown a modest ability to
outperform the soybean market, but not the corn market; advisory services
that outperform the market generally demonstrate more risk; performance
is generally not predictable; and marketing style varies considerably
among services.
Complete AgMAS Project reports are available online at the following
web site:
http://www.farmdoc.illinois.edu/agmas/
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