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The Crop-Side Difference: Relative Performance (Part 1/2)

3/3/2016

 
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DTN AgDaily used to display a statistic stating that, "...USDA statistics indicate farmers sell two thirds of their crop in the bottom one third of the crop's annual price range." So, if you're a farmer, what can you do to get into the TOP one third? Should you do it yourself, or hire one of the many marketing services available today? Here's some must have information on marketing service performance before you go shopping for one. P.S. We outperform.
Now, that introductory statistic was from 2003, a bit dated I know (like much of the valuable information in agriculture), but I will certainly be following up on the current stats regarding where farmers sell. For now, let's take a look at what previous studies have shown about market advisory service performance. Most of today's information will be coming from a 2003 presentation called Keys To Successful Grain Marketing made by Scott Irwin and Darrel Good from University of Illinois.

The Farmer

Right in the summary of their report, Good & Irwin state that (between 1975-2001) on average, producers under-perform the market --more so in corn than in beans. They also state that average producer marketing patterns have changed very little from year-to-year. Before we go on, it's important to note that the word average in this context simply means half of all Illinois farmers were below the data point, and half were above the data point. In this case, the data point that represents the average was below the average corn/bean contract price at the end of most years. Sounds technical, but averages are great for tracking performance...like in this chart:

Difference Between Farmer and Market Benchmark Price for Corn 
Central Illinois, 1975-2001

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Here are some summary stats that go with the chart before we go on:
  • All Crop Years         -   $ -0.08/bu 
  • Normal Crop Years -   $ -0.13/bu
  • Short Crop Years     -   $ +0.09/bu
As you might have guessed, this includes farmers' tenancies to price corn mostly in October and January, a pattern even more pronounced in soybeans. 

The Market Advisory Service

This next section's data comes from an Oklahoma State Extension study called Price Risk Management that references data from a University of Illinois study (Darrel Good and Scott Irwin).  Their evidence shows that, when looking at marketing advisors as a group, they added little to no extra value over time and concluded that, "(marketing strategy) made little to no difference in the profitability of the farms. Important management factors were costs, yields, and use of technology."  This conclusion is based off of a survey including 1,000 Kansas farms during a 10-year period attempting to explain the difference between the top 1/3 and the bottom 1/3 of farms in profitability.

Now, before you go calling your marketing advisor to cancel your service, take a look at the chart below. This information came from the University of Illinois section of the report.
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In a five year study, they subscribed to between 21 and 27 advisory newsletters. For those newsletters that included options and futures advice in their main plans, gains or losses were added to the effective average price, as well as standard brokerage and storage fees. In corn, of the 17 advisory firms that gave advice all 5 years of the study, seven of them produced an average price just slightly above (0.7 cents...not 7 cents) the 5 year average price benchmark.

The Crop-Side Difference

With such a meager price improvement, these studies beg the question, is it even worth it to be concerned with price? Are market advisory services just ways for brokers to collect more fees? At Crop-Side, we saw these flaws in the system many years ago, and that's exactly why we're so confident in our system. The chart below shows our corn performance vs. that same benchmark, in the MOST RECENT five years: 
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In summary: Yes, the data we used to compare against is old. Yes, the market changes all the time. And yes, some farmers don't even follow their market advisors advice. The point of the comparisons made today is that the long term averages weed out the lucky calls and anomaly years. Looking at farmers and marketing advisors as a whole, over time, shows neither group has a system that can consistently improve profitability. However, there are exceptions to every rule. I'm sure there are farmers that do fine on their own, and market advisors that do fabulous, but the bulk of both groups do not.

That's why a market advisor that outperforms at a low service cost is the optimal choice for most farmers. Next week, we'll be doing a bit more competitive comparisons using data from Top Producer Magazine. So stay tuned!

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*Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.
Photos used under Creative Commons from AllieKF, Rotherz67,thanks for 1.1 million views........., MojoBaer, pictures of money, ordjuret, smithbetty579, Philip Taylor PT, manoftaste.de, ** RCB **, James St. John, UnitedSoybeanBoard, Leonard John Matthews, voinonen, Scott McLeod, healthiermi