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"So How Do I Make Corn and Soybean Pricing Decisions?" was
prepared by U of I Extension specialists Darrel Good and Scott
Irwin and is available on the farmdoc site. It addresses what
Good and Irwin term the "pricing matrix" approach. "The
pricing matrix approach to developing corn and soybean marketing
strategies is a general approach to making pricing decisions,"
said Good. "It is similar to the oft-recommended strategy of
diversifying one's investments across different types of
investment products.
"The emphasis here is on strategy and not on the
implementation of specific pricing decision types such as
pricing tool, timing, etc. Implementation of pricing decisions
within a cell of the pricing matrix will be impacted by a
variety of factors, including crop insurance selections and
government program payments."
For corn and soybean producers, price risk has been one of
the highest risk management priorities for the farm business.
One of the major challenges, as well as sources of frustration,
of corn and soybean pricing is the extreme variability in
prices, not only across years, but within years.
"Over 25 years between 1982-83 and 2006-07, the average
marketing year price of corn received by Illinois producers
ranged from $1.54 in 1986-87 to $3.30 in 1995-96. The daily spot
cash price of corn in central Illinois during that time ranged
from $1.22 on Oct. 16, 1986, to $5.25 on July 11, 1996," said
Good.
"For soybeans, the 12-month marketing year average farm price
ranged from $4.50 in 2001-02 to $7.94 in 1983-84. The daily spot
cash price of soybeans in central Illinois ranged from $3.87 on
July 8, 1999, to $10.40 on March 22, 2004."
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Another source of challenge and frustration is that futures prices
cannot be anticipated with a high degree of accuracy.
"The traditional approach to making corn and soybean pricing
decisions has been to use a combination of analytical techniques --
generally characterized as fundamental and technical analysis -- to
forecast future price behavior and then time pricing decisions based
on those forecasts," said Good. "That approach has essentially been
one of attempting to 'beat the market.'"
Good and Irwin identify four steps necessary to implement the
pricing matrix approach.
"The first step is to select the appropriate time window for
pricing corn and soybean crops," said Good. "The second is to
determine the relevant set of crop pricing strategies. Third, decide
on the proportions of the crop to be marketed via each of the
pricing strategies. Finally, evaluate performance after the
marketing window is completed."
The complete report includes examples for producers to follow to
gain insights into adopting the pricing matrix approach for their
enterprises.
"We want to emphasize our belief that many producers are
substantially under-diversified in terms of pricing approaches, with
over-reliance on self-directed active strategies," said Good.
"Diversification across the four cells of the pricing matrix would
likely improve marketing performance for these producers.
"In addition, diversification would more than likely reduce the
risk and frustration of making corn and soybean pricing decisions
for most producers."
[Text from file received from
the University of
Illinois Extension] |
