GRAIN MARKETING: ARE FARMERS REALLY THAT BAD?

Transcription

1 GRAIN MARKETING: ARE FARMERS REALLY THAT BAD? Darrel L. Good, Scott H. Irwin and Joao Martines-Filho Executive Summary It is commonly asserted that, on average, corn and soybean producers sell 2/3 of their crops in the bottom 1/3 of the price range. Average price received for corn and soybeans is close to the average price offered by the market in central Illinois. A new measure of the distribution of pricing opportunities is developed, with timeweighted price ranges based on pre- and post-harvest prices adjusted for carrying costs. Average price received for corn and soybeans tends to be in the middle third of the price range over crop years. Evidence is inconsistent with argument that corn and soybean producers sell 2/3 of their crops in the bottom 1/3 of the price range. Performance of professional market advisory services provides useful perspective on the likely success of farmers in grain marketing. Little evidence that net advisory prices exceed market benchmark in corn. Substantial evidence net advisory prices exceed market benchmark in soybeans (+16 cents/bu.). Modest evidence that services exceed market benchmark for corn and soybean revenue ($3/acre). Few services have prices in the top 1/3 of price range for corn or soybeans. Better pricing performance tends to come at the cost of more risk. Few services outperform the market when both return and risk are considered. Quite difficult to predict winners and losers based on past pricing performance. Overall, the evidence suggests farmers will not easily beat the market. A new approach to grain marketing starts with farmers assessing past marketing performance and their skills in marketing.

2 Grain Marketing: Are Farmers Really That Bad? Darrel Good, Scott Irwin, and Joao Martines

3 Grain Marketing: Are Farmers Really That Bad? Perception versus Reality Realistic Expectations for Success A New Approach

4 Grain Marketing: Perception versus Reality Perception: on average, corn and soybean producers sell 2/3 of their crops in the bottom 1/3 of price range Reality:??

5 Farm Income Meeting Survey Results, December 12, 2000 Question On average, corn and soybean producers sell 2/3 of their crops in the bottom 1/3 of the price range True (%) 77 False (%) 23

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7 Grain Marketing: Reality Direct evidence: not available Rough evidence

8 Reality: Available Data Price received by farmers: NASS/USDA surveys elevators for bushels purchased and average price paid in IL monthly basis Overnight bids of country elevators for #2 yellow corn and #1 yellow soybeans for Central IL daily basis (IL Dept of Ag Market News/ILDA)

9 Reality: Data Adjustments for Comparisons (harvest equivalent) Average Price Received: weighted by the percent of crop marketed for each month (marketing year) Average Price Offered: weighted average of daily Central IL bids over two-year marketing window (one year before and one year after harvest) All post-harvest sales are adjusted for carrying costs (interest rate + commercial storage) Average Price Offered are adjusted for yield

10 Corn Price Offered, 1999 Crop Year 2.80 First Day of Harvest Post-Harvest Cash Price + LDP Pre-Harvest Forward Contract Bid Price + Average Harvest LDP Average Loan Rate Post-Harvest Cash Price + LDP - Carrying Charge 1.40 $/bushel 9/1/ /4/ /6/ /9/1998 1/11/1999 2/13/1999 3/18/1999 4/20/1999 5/23/1999 6/25/1999 7/28/1999 8/30/ /2/ /4/ /7/1999 1/9/2000 2/11/2000 3/15/2000 4/17/2000 5/20/2000 6/22/2000 7/25/2000 8/27/2000

11 Comparison of Averages: Price Received to Price Offered for Corn Farmers in IL Average Price Average Price Received Offered Year Illinois Central Illinois ---$/bushel Average Std. Dev Source: NASS/USDA and IL Dep of Ag Market News

12 Comparison of Averages: Price Received to Price Offered for Soybean Farmers in IL Average Price Average Price Received Offered Year Illinois Central Illinois ---$/bushel Average Std. Dev Source: NASS/USDA and IL Dep of Ag Market News

13 Comparison of Price Distribution: Conventional Approach Post-harvest cash prices Range of prices = high - low Divide range into top third, middle third, and bottom third No adjustment for carrying costs

14 Conventional Approach: Corn Price 2.40 in Central IL, 1999 Crop Year High Top Third of the Price Range Middle Third of the Price Range $/bushel 1.60 Bottom Third of the Price Range Low Crop Year, Convetional

15 Comparison of Price Distribution: Box Plot Approach Pre- and Post-harvest cash prices (two-year marketing window) Adjustments for carrying costs (interest rate + commercial storage) Time weighted distribution

16 Box Plot Approach: Corn Price in Central IL, 1999 Crop Year High 2.20 Top Third of the Price Range Middle Third of the Price Range 1.84 Average Price Offered Bottom Third of the Price Range Low Crop Year, Box Plot

17 Conventional versus Box Plot Approach: Corn Price in Central IL, 1999 Crop Year $/bushel Crop Year, Convetional 1999 Crop Year, Box Plot

18 Corn Prices: Box Plot $/bushel

19 Corn Prices: Perception 2/3 of the crop is marketed in the bottom third of price range 1/3 of the crop is marketed in the middle and top third of price range

20 Corn Prices: Perception $/bushel Perception

21 Corn Prices: Perception x Reality "Rough Reality" = Price Received $/bushel Perception

22 Soybean Prices: Box Plot $/bushel

23 Soybean Prices: Perception $/bushel Perception

24 Soybean Prices: Perception x Reality 9.00 "Rough Reality" = Price Received $/bushel Perception

25 Summary of Grain Marketing: Perception versus Reality Average price received for corn and soybeans in IL is close to the average price offered by the market in central Illinois A new measure of the distribution of pricing opportunities is developed, with time-weighted price ranges based on pre- and post-harvest prices adjusted for carrying costs: box plot approach Evidence is inconsistent with argument that corn and soybean producers sell 2/3 of their crops in the bottom 1/3 of the price range

26 Key Points Does NOT prove that average price received by farmers equals the average price offered by the market Farmers may under-perform the market, just not as much as popular perception Likely a wide range of grain marketing performance across farmers

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28 Grain Marketing: Realistic Expectations for Success Key Question: What are the odds of a farmer consistently beating the market? Would like to have direct evidence on the pricing performance of farmers, but not available Examine five-year performance record of market advisory services in corn and soybeans for relevant evidence

29 Farm Income Meeting Survey Results, December 12, 2000 Question On average, corn and soybean producers sell 2/3 of their crops in the bottom 1/3 of the price range In general, professional market advisory services recommendations result in average prices in the top 1/3 of the price range True (%) False (%) 23 72

30 National Survey of Market Advisory Service Subscribers, Jan/Feb 2000 Is a market advisory service a tool to receive a higher than average price? Not at all Certainly Avg. %

31 Agricultural Market Advisory Service Project (AgMAS) Little research on performance of market advisory services In 1994, the AgMAS Project was started Goal of providing unbiased and rigorous performance evaluation Evaluate performance in marketing corn, soybeans and wheat

32 Contacting the AgMAS Project Project Manager: Joao Martines-Filho Office Address: 434a Mumford Hall, 1301 West Gregory Drive, University of Illinois, Urbana, IL Phone: (217) Website: web.aces.uiuc.edu/farm.doc/agmas

33 AgMAS Review Panel External panel reviews all research output of the AgMAS Project Members: Frank Beurskens, E-markets Jeffrey Brunoehler, Illinios banker Renny Ehler, Illinois Farmer Chris Hurt, Purdue University Terry Kastens, Kansas State University Robert Wisner, Iowa State University

34 Two Important Questions Do market advisory services, on average, outperform an appropriate market benchmark? Is market advisory service performance predictable from year-to-year?

35 AgMAS Data Collection Tracking about 25 advisory services since September 1994 Paid subscriptions obtained for each service Recommendations recorded in real-time Data available for corn and soybeans for 1995, 1996, 1997, 1998 and 1999 crops

36 Examples of Advisory Service Recommendations Stewart-Peterson Advisory Service: May 12, 1995: forward contract 10% of 1995 expected corn production Zwicker Advisory Service February 1, 1996: buy November 96 soybean futures at $7.08 to use as a replacement for 50% of 1995 crop cash sales to date

37 Simulation of Advisory Service Performance Simulation for central Illinois farm Two-year marketing window Transactions applied to expected or actual yield per acre Cash sales are discounted for interest and storage charges Net advisory prices are stated in harvest equivalent terms LDPs/MLGs included for 1998 and 1999 crops

38 Calculation of Net Advisory Prices: 1998 Corn Unadjusted Carrying Charges Futures & Net Market Advisory Cash Sales Interest Storage Shrink Net Cash Options Brokerage LDP / Advisory Program Price Costs Costs Costs Sales Price Gain Costs MLG Price ---$/bushel--- Ag Line (cash-only) Ag Line (hedge) Ag Profit

39 Market Benchmark Price Benchmark needed to evaluate performance relative to the pricing opportunities provided by the market Use the average cash price over the two-year marketing window for a crop 1 year pre-harvest: daily forward cash prices 1 year post-harvest: daily spot cash prices

40 Average Net Advisory Prices, Corn, Net Advisory Price ($/bu., hvst. equv.) Market Benchmark Advisory Program Rank

41 Average Net Advisory Prices, Soybeans, Net Advisory Price ($/bu., hvst. equv.) Market Benchmark Advisory Program Rank

42 Average 50/50 Advisory Corn and Soybean Revenue, /50 Advisory Revenue ($/acre, hvst. equv.) Advisory Program Rank Market Benchmark

43 Number of Advisory Programs Above Market Benchmark Corn Soybeans Revenue (%) (%) (%)

44 Average Program Returns Above Market Benchmark Corn Soybeans Revenue ( /bu.) ( /bu.) ($/acre)

45 Pricing Performance Compared to the Distribution of Market Prices, Corn, Price Range Above Top 1/ Top 1/ Middle 1/ Bottom 1/ Below Bottom 1/ Total 100% 100% 100% 100% 100% 100%

46 Pricing Performance Compared to the Distribution of Market Prices, Soybeans, Price Range Above Top 1/ Top 1/ Middle 1/ Bottom 1/ Below Bottom 1/ Total 100% 100% 100% 100% 100% 100%

47 Average Net Advisory Price and Risk, Corn, Average Net Advisory Price ($/bu.) Market Benchmark Correlation = Standard Deviation of Net Advisory Price ($/bu.)

48 Pricing Performance and Risk Relative to Benchmark Average Net Advisory Price ($/bu.) Higher Price Less Risk Market Benchmark Lower Price Less Risk Higher Price More Risk Lower Price More Risk Standard Deviation of Net Advisory Price ($/bu.)

49 Pricing Performance and Risk Relative to Benchmark, Corn, Average Net Advisory Price ($/bu.) Higher Price Less Risk (1 program) Market Benchmark Lower Price Less Risk (4 programs) Higher Price More Risk (4 programs) Lower Price More Risk (9 programs) Standard Deviation of Net Advisory Price ($/bu.)

50 Average Net Advisory Price and Risk, Soybeans, Average Net Advisory Price ($/bu.) Market Benchmark Correlation = Standard Deviation of Net Advisory Price ($/bu.)

51 Pricing Performance and Risk Relative to Benchmark, Soybeans, Average Net Advisory Price ($/bu.) Higher Price Less Risk (4 programs) Market Benchmark Lower Price Less Risk (0 programs) Lower Price More Risk (4 programs) Higher Price More Risk (10 programs) Standard Deviation of Net Advisory Price ($/bu.)

52 Average Net Advisory Price and Risk, 50/50 Revenue, Average Advisory 50/50 Revenue ($/acre) Correlation = Market Benchmark Standard Deviation of 50/50 Advisory Revenue ($/acre)

53 Pricing Performance and Risk Relative to Benchmark, 50/50 Revenue, Average 50/50 Advisory Revenue ($/acre) Higher Revenue Less Risk (0 programs) Market Benchmark Lower Revenue Less Risk (3 programs) Higher Revenue More Risk (8 programs) Lower Revenue More Risk (7 programs) Standard Deviation of 50/50 Advisory Revenue ($/acre)

54 Perfect Predictability of Advisory Service Program Rank R ank R ank

55 Advisory Service Program Rank, Corn, 1995 vs Correlation = Rank Rank

56 Advisory Service Program Rank, Corn, 1996 vs Correlation = Rank Rank

57 Advisory Service Program Rank, Corn, 1997 vs Correlation = Rank Rank

58 Advisory Service Program Rank, Corn, 1998 vs Correlation = Rank Rank

59 Advisory Service Program Rank, Soybeans, 1995 vs Correlation = Rank Rank

60 Advisory Service Program Rank, Soybeans, 1996 vs Correlation = Rank Rank

61 Advisory Service Program Rank, Soybeans, 1997 vs Correlation = Rank Rank

62 Advisory Service Program Rank, Soybeans, 1998 vs Correlation = Rank Rank

63 Advisory Service Program Rank, 50/50 Revenue, 1995 vs Correlation = Rank Rank

64 Advisory Service Program Rank, 50/50 Revenue, 1996 vs Correlation = Rank Rank

65 Advisory Service Program Rank, 50/50 Revenue, 1997 vs Correlation = Rank Rank

66 Advisory Service Program Rank, 50/50 Revenue, 1998 vs Correlation = Rank Rank

67 Advisory Service Program Rank, Corn vs. Soybeans, Correlation = Soybean Rank Corn Rank

68 Advisory Service Program Rank, Corn vs. Soybeans, Correlation = Soybean Rank Corn Rank

69 Advisory Service Program Rank, Corn vs. Soybeans, Correlation = Soybean Rank Corn Rank

70 Advisory Service Program Rank, Corn vs. Soybeans, Correlation = Soybean Rank Corn Rank

71 Advisory Service Program Rank, Corn vs. Soybeans, Correlation = Soybean Rank Corn Rank

72 Summary of Pricing Performance of Advisory Services Little evidence that net advisory prices exceed market benchmark in corn Substantial evidence net advisory prices exceed market benchmark in soybeans (+16 cents/bu.) Modest evidence that services exceed market benchmark for corn and soybean revenue ($3/acre) Few services have prices in the top 1/3 of price range for corn or soybeans

73 Summary of Pricing Performance of Advisory Services Better pricing performance tends to come at the cost of more risk Few services outperform the market when both return and risk are considered Quite difficult to predict winners and losers based on past pricing performance Overall: Tough to beat the market

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75 Grain Marketing: A New Approach

76 What Is My Grain Marketing Track Record? Good? Average? Poor?

77 Average Price Received Compared to a Realistic Benchmark Last Year? 3 Year Average? 5 Year Average?

78 Yes, I m Good! Inclined to be an Active Marketer

79 Active Marketer Needs: Information Analysis Education Advisor

80 Information, Analysis, Education University of Illinois Extension Private Sector

81 Choosing An Advisor Past Performance Marketing Profile

82 1998 Corn Marketing Profile for Click to edit Master title style Pro Farmer Cash Program 120% Click to edit Master text styles 100% Second level Third 80% level Net Amount Sold 60% 40% Fourth level» Fifth level 20% 0% 9/2/97 1/2/98 5/2/98 9/2/98 1/2/99 5/2/99 9/2/99 81

83 1998 Corn Marketing Profile for Brock Hedge Program 120% 100% Net Amount Sold 80% 60% 40% 20% 0% 9/2/97 1/2/98 5/2/98 9/2/98 1/2/99 5/2/99

84 1995 Corn Marketing Profile for Ag Resource Program 120% 100% 80% Net Amount Sold 60% 40% 20% 0% -20% -40% -60% 9/1/94 1/1/95 5/1/95 9/1/95 1/1/96 5/1/96

85 1996 Corn Marketing Profile for Ag Resource Program 140% 120% Net Amount Sold 100% 80% 60% 40% 20% 0% 9/1/95 1/1/96 5/1/96 9/1/96 1/1/97 5/1/97

86 1997 Corn Marketing Profile for Ag Resource Program 120% 100% 80% Net Amount Sold 60% 40% 20% 0% -20% -40% -60% -80% 5/13/96 9/13/96 1/13/97 5/13/97 9/13/97 1/13/98 5/13/98

87 1998 Corn Marketing Profile for Ag Resource Program 250% 200% 150% Net Amount Sold 100% 50% 0% -50% -100% -150% 9/2/97 1/2/98 5/2/98 9/2/98 1/2/99 5/2/99

88 I m A Poor Marketer Inclined to be a Passive Marketer

89 Select A Passive Strategy Indexing Mechanical Do-It-Yourself

90 Indexing Select an External Source to Trigger Sales

91 Comparison of 24-Month Market Benchmark to Mechanical Strategy - Corn Corn 24-Month Average Mechanical Cash Price Strategy Average Std. Dev

92 Comparison of 24-Month Market Benchmark to Mechanical Strategy - Soybeans Soybeans 24-Month Av erage Mechanical Cas h P rice S trategy Average Std. Dev

93 Mechanical Strategy Price Equal Amounts Every Other Month for Two Years Will You Do It?

94 Portfolio of Active and Passive Percent of Crop Corn/Soybeans

95 The End

96 An active marketer believes they can beat the market, so they should adopt strategies that attempt to time pricing decisions during periods of high prices. A passive marketer does not believe they can beat the market, so they should adopt strategies that simply achieve the average price offered by the market. Farmers should consider marketing in a portfolio context where the two components are active and passive marketing. A key decision is the weights that a farmer places on the active and passive marketing components.