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Study evaluates risk management tool

[MAY 27, 2003]  URBANA -- Professional market advisory services constitute an important risk management tool for farmers, but does the use of several advisory services provide greater risk protection than following only one service? A new University of Illinois study indicates there is greater risk protection in numbers, but the benefits decline quickly as more and more services are added.

"There does not appear to be a strong justification for farmers adopting portfolios with a large number of advisory services," said Scott Irwin, U of I professor of agricultural marketing and one of the authors of the study. "Farmers may well choose portfolios with as few as two or three programs, since the relatively high subscription costs associated with larger portfolios can be avoided while obtaining most of the benefits from diversification."

The study, "Portfolios of Agricultural Market Advisory Services: How Much Diversification is Enough?" was produced by the AgMAS Project and authored by Irwin and Darrel Good, also a professor in the Department of Agricultural and Consumer Economics; along with Brian G. Stark, a former graduate research assistant; Silvina M. Cabrini, a current graduate research assistant; and Joao Martines-Filho, manager of the AgMAS Project. The complete report is available online at http://www.farmdoc.uiuc.edu/
agmas/reports/index.html
.

Funding support for the study and the AgMAS Project, which monitors the performance of agricultural market advisory services, comes from the USDA's Cooperative State Research, Education and Extension Service, the American Farm Bureau Foundation for Agriculture, and the Illinois Council on Food and Agricultural Research.

"Risk management is one of the most important areas in farm management," explained Irwin. "Professional market advisory services can be an important source of information in efforts to manage price risk."

 

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For a subscription fee, these services offer specific advice to farmers on how to market their commodities. For several years, the AgMAS Project has monitored and evaluated about 25 advisory services each crop year.

"When both average price and risk are considered, only a small fraction of services for corn and a moderate fraction for soybeans outperform market benchmarks," said Irwin. "On the other hand, a majority of the services outperformed a farmer benchmark for both crops."

These studies, however, examined market advisory services only on a stand-alone basis against benchmark prices. Some economists believe that a combination of market advisory services may have greater risk-return benefits than using only one. The U of I study employed economic analysis tools to examine this assertion.

Irwin said the study indicated that the risk reduction benefits of diversification among advisory services is relatively small compared with the results obtained in previous studies of stock portfolios.

"This is mainly because agricultural advisory prices, on average, are highly correlated," he said. "Our study found that most risk reduction benefits are achieved with small portfolios. There does not appear to be strong justification for farmers adopting portfolios with a large number of advisory services."

[University of Illinois news release]


Weekly outlook

Prices and prospects

[MAY 20, 2003]  URBANA -- Recent price strength provides an opportunity for producers to advance sales of both old and new crop corn and soybeans, said a University of Illinois Extension marketing specialist.

"The strong basis in some areas and inverted futures market suggests that all old crop inventory should be sold," said Darrel Good. "Long positions to speculate on summer weather markets may be less costly in the futures market than in the cash market under the current price structure.

"New crop prices for both corn and soybeans are well above the loan rate in many areas and above the USDA's projected average for the 2003-04 marketing year if trend-line yields are reached in 2003."

Good's comments came as he reviewed recent market actions. Corn and soybean prices were generally higher again last week, although some weakness was noted on Friday (May 16). Both old and new crop soybean futures established new contract highs, and the central Illinois average cash price of soybeans moved to the highest level in nearly five years.

Old crop corn futures moved to the highest level since early November 2002, while spot cash prices and new crop futures moved to the highest level since early September 2002.

"Much of the buying interest in corn and soybeans since the first of May was generated by wet weather in many areas and the resultant slowdown in planting progress," said Good. "Additionally, soybean exports continued at a pace above that projected by the USDA. Given that much of the friendly news for corn prices was associated with the new crop, it is somewhat surprising that July 2003 futures were stronger than December 2003 futures."

July futures moved from a 2-cent discount to December futures at the first of the month to a 45-cent premium on May 16. In contract, July 2003 soybean futures moved from a 78.5-cent premium to November futures on May 1 to a 70.25-cent premium on May 16.

"Given the relative abundance of old crop corn supplies and the tightness of old crop soybean supplies, the spreads might have been expected to move in opposite directions," said Good. "The market may be expecting a sharp decline in the rate of U.S. soybean exports, as importers increasingly turn to South American supplies. In fact, the USDA's weekly export inspection report released on May 19 indicated that exports for the week ended May 15 totaled only 3.7 million bushels."

Good noted that is about one million bushels below the weekly rate required to reach the USDA projection for the year. Reports of some imports of South American soybean meal into the United States may also be a signal that, while tight, supplies may be adequate until the new harvest. The level of June 1 inventories will not be revealed until June 30.

 

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The soybean price pattern continues to be more interesting than the corn price pattern. Since 1973-74 (29 years), the average cash price of soybeans in central Illinois has established a marketing-year high in the spring or summer months 19 times. The high occurred in April once, May four times, June four times, July eight times and August twice.

"For a historical perspective, then, we are in the time frame when highs in cash prices should be expected, with some chance the high may have been established last week," said Good. "With the entire growing season to unfold, however, prices could continue to be volatile."

An examination of price patterns for November 2003 futures provides less confidence that a high has been established. The November contract has reached a high in May only once (1990) over the past 32 years. The high to date for the November 2003 contract of $5.76 is the lowest high for a November contract since 1972.

The recent strength in corn prices has left prices well within the range established since September 2002. The only unusual feature of prices to date continues to be the very narrow trading range for new crop contracts. December 2003 futures have a trading range of only 38.5 cents. Since 1971, the December contract has had a low trading range of 41 cents (1972) and a high of $2.05 (1974). Since 1989, the trading range has varied from 55 cents to $1.50.

"Historical price patterns are of some interest and may provide some general guidelines for the current year, but market fundamentals will dictate how prices unfold over the next few months," said Good. "The market for corn and soybeans will likely continue to focus on U.S. crop weather, planting progress and early crop conditions.

"Another look at planted acreage of corn and soybeans will not be available until the release of the USDA's acreage report on June 30. One popular private source has forecast an increase in both corn and soybean acreage compared to March intentions."

[University of Illinois news release]


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