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"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]
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"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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