Can You Improve Your Marketing Performance?
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A widely accepted axiom about producers' marketing performance states that "farmers sell two-thirds of their crop in the bottom one-third of the crop's annual price range." However, analysis of the average corn and soybean price received by Illinois farmers over the last 27 years suggests that the statement is in error. For the 1975 through 2001 crop years, the average price received by Illinois corn producers was in the upper two-thirds of the price range 56 percent of the time. For soybeans, the average price received was in the upper two-thirds of the price range 82 percent of the time.
There is substantial evidence that producers, on average, do a better job of marketing their crops than generally perceived. At the same time, there is considerable evidence that farmers, on average, do underperform the market. The market price is represented by the average daily price offered by the market for a given crop over the period from one year before harvest to one year after harvest. Over the past 27 crop years, the difference between the market price and the farmer price averaged $.09 for corn and $.05 for soybeans. Based on a central Illinois farm with average yields and a 50-50 corn/soybean rotation, the average underperformance amounted to about $8 per acre. When loan deficiency and marketing loan gain payments are accounted for (actual farmer receipts compared to average of daily rates for the 1998 through 2001 crops), the average underperformance narrows to $.08 for corn, $.04 for soybeans, and $7 per acre. The average underperformance multiplied by bushels produced in Illinois amounted to an average of $151 million per year over the 27-year period.
Marketing Performance by Type of Year
There has been a pronounced difference in farmer marketing performance in normal-sized crop years as compared to short crop years. On average, producers have actually outperformed the market in short crop years ($.09 per bushel for corn and $.33 for soybeans) but significantly underperformed the market in years with normal-sized crops ($.13 per bushel for corn and $.14 for soybeans). These results represent an underperformance of $12 per acre in normal crop years and an overperformance of $10 per acre in short crop years. The question is, then, do farmers (on average) market their crops differently in short-crop years? The question cannot be answered completely because data about the timing of farmers' pricing decisions are not available. The USDA, however, does provide estimates of the distribution of marketings (delivery) by month. Those data indicate that average marketing patterns do not vary significantly by the type of year (normal crop or short crop).
Marketings (deliveries), as a percentage of the total, peak at harvest and in January, with both periods likely reflecting a fair amount of forward contract sales. Monthly marketings are relatively constant from April through August. Those average percentages vary by only small amounts when observed by type of crop year. For example, the percentage of the corn crop marketed in the September through December period averaged 34 percent for all years since 1975. The average was 33 percent in normal-sized crop years and 36 percent in short crop years. For soybeans, the average for that four-month period was 36 percent for all years, and 35 percent and 36 percent for normal and short crop years, respectively. The same consistent pattern is observed for the January through April and May through August periods.
If marketing pattern does not explain the difference in marketing performance, what does? The answer appears to lie in the difference in seasonal price pattern in normal and short crop year .
For both corn and soybeans, average price patterns in the pre-plant period are almost identical for normal-sized and short crop years. However, in short crop years, corn prices, on average, tend to move sharply higher from planting until harvest, remain high through the spring after harvest, and then decline sharply in the summer following harvest (all post-harvest prices adjusted for storage and interest costs). In normal-sized crop years, prices, on average, move steadily lower from planting time through the summer after harvest. In short crop years, soybean prices, on average, move sharply higher from planting time until harvest and then decline steadily through the summer after harvest. The average price pattern in normal crop years is the same as for corn, steadily lower from planting time through the summer after harvest.
The fairly constant average marketing pattern by farmers from year to year results in better performance in short crop years because a larger percentage of the crop is marketed during the period of higher prices. The one important common factor for both corn and soybeans in both normal and short crop years is the relatively large decline in prices during the summer after harvest.
The observed marketing behavior of Illinois corn and soybean producers and the observed price pattern of corn and soybeans since 1975 suggest that average pricing performance could be improved by a shift in the marketing pattern. On average, more sales in the pre-harvest, particularly pre-plant, period and fewer sales in the summer after harvest would have resulted in higher average prices received by Illinois corn and soybean producers.
Performance of Individual Farmers
While the analysis of average marketing performance produces interesting results, it is recognized that performance of individual producers likely varies considerably from the average. Some producers may consistently outperform the market, while others consistently underperform the market. Each producer needs to start by objectively determining his or her historical marketing performance. That determination is a two-step process. The first step is to calculate the historical marketing track record, and the second is to compare that track record to objective benchmark prices.
Calculating a historical marketing track record can be difficult. That process would require a record by crop year of number of bushels sold, all cash and forward pricing transactions, and all futures and options transactions. All cash sales would have to be adjusted for moisture and quality discounts and for storage and interest costs. In addition, loan deficiency and marketing loan gain payments would need to be included. The result of this process, however, would be an accurate estimate of net price received by year for No. 2 yellow corn and No.1 yellow soybeans that could be compared to a market benchmark price.
There may be a shorter method of calculating a track record, however, that would provide useful, if not complete, results. This short cut would consist of computing the percentage of the crop priced each month (pre-and post-harvest) and multiplying that percentage by the average monthly publicly reported price (net of storage and interest costs) offered by the market in each of those months. To that average, the producer would add loan deficiency payments and make adjustment for any "speculative" gains or losses in the futures or options markets. For most years, this method will result in a "ballpark" estimate of average price received.
Whether the complete method or the short-cut method of calculating a track record is used, the results could be compared to the average price offered by the market. Ideally, the average price would be the daily average price offered in the local market over a two year period (pre- and post-harvest), with post-harvest prices discounted for storage and interest costs. For the short-cut procedure, publicly reported average prices could be used, though post-harvest prices would have to be discounted for storage and interest costs. For both methods, average loan deficiency payments would need to be added to the average price.
The above procedure would allow producers to determine if, on average, they are underperforming or outperforming the market. Those outperforming the market would be encouraged to continue their successful approach to marketing.
Those who have historically underperformed the market may be inclined to alter their approach to marketing to include some passive or mechanical strategies to help avoid past mistakes. There are now available a number of averaging or indexing contracts that producers could use to bring some added discipline to the marketing decisions. Many of these contracts are offered in the pre-harvest period as a way to encourage additional pre-harvest sales by producers. These contracts establish the rules for pricing those bushels committed to the contract, and then pricing is completed automatically during the contract period. These contracts can range from a simple approach that offers the producer the average cash price over a pre-determined time period to more complex contracts that may include minimum and/or maximum price provisions, vary the proportion of the bushels sold each month, establish pre-determined price targets, or base pricing triggers on price behavior (for example, price only on days when prices are lower, or price when moving averages are violated). Some contracts are based on the pricing recommendations of a professional market advisory service. The goal of each of these contracts is to achieve a price at or above the average offered by the market over a given time period.
Summary
Producers may be able to improve their marketing performance by: 1) developing realistic price objectives; 2) constructing a track record of marketing performance; 3) computing market benchmarks; 4) evaluating marketing performance by type of year; 5) identifying persistent marketing mistakes; and 6) determining an appropriate portfolio of marketing strategies, active and passive.
Concluding Remarks
Seed and seedling diseases take a significant toll on soybean crops each year, and in severe cases, can kill well over 50 percent of seedling stands within two to four weeks after planting. Alternatively, they may take a hidden toll, with the full impact difficult to determine. They can kill 5 to 10 percent of plants in scattered patterns that may escape notice in fields, or they may reduce the vigor and function of root systems. Fortunately, management strategies are available to minimize losses from soybean seedling diseases, and research is underway to gain new information about these diseases that should lead to improved management and reduced losses.