farmgate: Market Advisory Services: Judging Their Performance
When you sell grain, do you hit the upper, middle, or lower one-third of the price range? “It is a common belief that farmers substantially under-perform the market, which is reflected by the oft-repeated adage that, farmers market two-thirds of their crops in the bottom third of the price range.” And if you turn to a market advisory service to help you market your crop, where do their recommendations fall, and do you even follow them? My, what testy questions we need answered!
You probably have some general familiarity with the AgMAS project, carried on for the past decade at the University of Illinois, which evaluated various market advisory services to determine whether their recommendations were above or below certain market benchmarks and how they compared to typical farmer marketing practices. The AgMAS staff has issued its latest report, covering the ten year period from 1995 to 2004, and involving 41 services making corn recommendations and 40 for soybeans. Since services come and go from time to time, it was only possible to tract the performance of a limited number of services through the entire period. “The average advisory price for corn ranges between $1.99 per bushel in 2001 and $3.03 per bushel in 1995 (based on commercial storage costs). Range statistics reveal that net advisory prices for corn vary substantially within individual crop years. The most dramatic example is 1995, where the minimum is $2.29 per bushel and the maximum is $3.90 per bushel. Even in years with less market price volatility, it is not unusual for the range of prices across advisory programs to be near a dollar per bushel.”
AgMAS uses benchmarks for judging performance, including 20 and 24 month averages, plus the average of USDA projections and an average for the market. “However, there are substantial differences in benchmark prices for a particular crop year. For example, the 24-month market benchmark in 1998 is $2.24 per bushel, while the farmer benchmark using market prices is only $1.92 per bushel.” The most dramatic example is 2003, where the range in advisory prices is nearly $4 per bushel.
Instead of comparing the long term performance of one market advisory service against others, the AgMAS study considered the performance of the services as a group against the benchmarks. Secondly, farmers may subscribe to an advisory service for general information about market conditions, and not be concerned about their recommendations on “pulling the trigger.”
AgMAS establishes the farmers’ record of marketing as one of the benchmarks, and says “The frequency of farmer benchmark prices, falling in the top-third of the price range over 1995-2004 averages 10% in corn and 18% in soybeans across all four possible comparisons (24- and 20-month marketing windows and two versions of the farmer benchmark.” Another comparison that AgMAS makes is the difference between the recommendations of the services and the farmer marketing benchmark. “The average advisory return relative to the farmer benchmarks is $8 to $12 per acre, or about three percent of average farmer benchmark revenue. Even though returns are small and mainly from corn, they nonetheless represent a non-trivial increase in net farm income (defined as returns to farm operator management, labor and capital), which averages $61 per acre for grain farms in central Illinois over 1995-2004”
So what is the bottom line? Are market advisory services worth their subscription fee? AgMAS found that services can hit the top third of the market some times, but fall in the middle third even more often. “On average, the results show that the frequency of advisory programs pricing in the top-third of the corn price range over 1995-2004 is modest, between 17 and 25%. By far the largest average frequency occurs in the middle third of the corn price range, ranging from 58 to 63%. Price range results for soybeans are similar to the results for corn. The frequency of advisory programs pricing in the top-third of the soybean price is between 17 and 19% and the largest average frequency occurs in the middle third of the soybean price range, ranging from 67 to 69%.”
Summary:
Despite complex calculations, charts on the wall, and arcane formulas, the performance of marketing advisory services reflects the fact that grain marketing is more of an art than a science. While less than 25% of the time the services have been able to peg the top third of the market, their service seems to prevent a subscriber from being in t bottom third. The AgMAS survey of the past 10 years of performance by subscription services certainly shows that one service is never guaranteed to outperform all of the others every year. But the survey also indicates that market advisory services perform valuable functions in conveying strategic market information, which a producer may not have, or have time to obtain from independent sources. In those cases, their service as a channel of communications can be more valuable than a market recommendation, which may or may not be followed.
Posted by Stu Ellis on April 25, 2006 6:46 AM to farmgate