These may be the two most common axioms in grain marketing. “Farmers sell two-thirds of their crops in the bottom third of the market,” says the first. Then, adds the second, “Professional marketers routinely hit the top third.”
But do those truisms — what we might call the professional edge — stand up to scrutiny? The answer is no, according to a new U. S. research project called AgMAS.
In fact, over the long term, the researchers found that whether you’re a farmer or a professional marketing service, your selling price tends to be in the middle of the price range. There’s scant difference, they say, between the prices achieved by farmers who market on their own, and farmers who hire a professional market advisory service.
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These startling revelations are the result of 10 years of research by Scott Irwin and Darrel Good at the University of Illinois, where they compared the marketing performance of market advisory services against the prices individual producers received when marketing their production themselves.
The University of Illinois team launched the research in 1994 when more and more farmers were hiring market advisory services, believing such services would improve their ability to manage price risk.
Actual data collection took place from 1995 through to the 2004-05 crop year. AgMAS started each year with a hypothetical farm and crop yield, and then subscribed to a large number of market advisory services, providing a good representation of the services available to Illinois area growers.
There were at least 23 market advisory services evaluated for each crop studied in each crop year. AgMAS staff followed the recommendations made by each of the services until the virtual crop they had to sell was 100 per cent priced.
For comparison purposes, Irwin and Good developed two benchmarks. One was the average market price offered to growers over the selling period. The second benchmark was the average price actually achieved by producers.
The researchers then assessed the effectiveness of the market advisory services, first by comparing the price they generated to see whether it fell in the top, middle or bottom third of the trading range for the year, and then to look at how their price compared to the average price received by farmers.
While analysis is still ongoing, Irwin has already reached one conclusion: “Our results show, at best, there was a very small price performance advantage by following advisory services recommendations for marketing soybeans and corn in Illinois from 1995-2004.”
In fact, Irwin adds, when it comes to wheat, the advisory services actually underperformed the market.
Irwin appreciates that growers find it hard to accept average prices for their grains, and that they are therefore looking for help. Based on AgMAS results, however, simply relying on market advisory services won’t guarantee higher prices.
“Growers should lower their expectations regarding the long term price improvements that advisory services can provide” Irwin says.
Across a decade of research, AgMAS found that market advisory firms hit the top third of the corn market only 17 to 25 per cent of the time. The comparable frequency for top-third pricing for soybeans was only 17 to 19 per cent.
For Irwin, there were two more big surprises. The first was the lack of consistency. The study wasn’t set up to perform detailed rankings that would compare how well the individual marketing services performed. However, observed Irwin, “We found that a service that outperformed the market one year may underperform the next.”
The second surprise was “the huge variability in prices recommended by the services,” says Irwin.
In fact, throughout the 10-year project, it wasn’t unusual to see a $1 a bushel range in corn prices between advisory services during a crop year.
On a per-acre basis for soybeans, in four of the 10 years of the study, the difference between best and the worst performing advisory service amounted to over $100 per soybean acre.
Irwin says growers shouldn’t interpret this comprehensive report as saying market advisory services are a poor investment.
Instead, Irwin says, they are an important tool, and the message that he wants farmers to get is to broaden their risk-reduction strategies beyond simply hiring a market advisory service in order to price.
It’s also good to look at the full range of benefits that a market advisory service can deliver, Irwin adds. Even if an advisory service may have failed to achieve top-third pricing, it probably still provided valuable information and market analysis to the farmer.
Of course, Irwin says, Canadian growers must remember this study focused on corn, soybean and wheat growers in central Illinois. Even though many market advisory services serve many states, and some of the services in the study also do business north of the border, there are differences between marketing opportunities for Illinois and Canadian farmers. However, Irwin doesn’t know of any standardized ranking of advisory services in Canada either so, he says, the general “buyer beware” message still fits. CG
