How Farmers Use Professional Market Advice

Survey reveals that farmers who subscribe to market advisory services are generally more active marketers, using forward-pricing techniques more than non-users

For nearly 10 years, the University of Illinois has been evaluating trends and effectiveness of professional ag market advisors, through the Agricultural Market Advisory Service (AgMAS) Project (www.farmdoc.uiuc.edu/agmas/index.html)

Affiliated AgMAS research and surveys point out that the increasing importance of market advisory services in the decision-making process of farmers is part of an overall trend towards increased farm business reliance on external consultants in operational capacities.

Statistics on subscription fees for advisory services tracked by the AgMAS Project from 1995-2001 indicated that the fixed annual cost for a basic program averaged about $300/year over this time period, ranging from just under $150 to about $600. 

A 2000 AgMAS survey of close to 1,300 farmers in the Midwest, Great Plains and Southeast yielded more information about farmers’ use of ag marketing services.  The survey was conducted by Olga Isengildina, Joost Pennings, Scott Irwin, and Darrel Good, of the University of Illinois.

On average, the respondents farmed nearly 2,000 acres and most had annual sales above $100,000. The survey respondents were, on average, somewhat younger than the overall population of US farmers: 44 versus 54 years of age.  About 82% of the survey respondents used ag marketing services, while 18% did not. Some of the survey observations:

Users of ag market services reveal a significantly greater preference for risk than non-users. This finding is intuitive, because if farmers are willing to take more risk, they are more likely to be involved in sophisticated marketing strategies and may be in greater need for marketing information and advice.

The majority of users rely on a portfolio of services and the impact of individual service providers can be difficult to differentiate.

Survey respondents indicated that they are more likely to use a professional market advisor that matches their marketing philosophy and style.

On average, survey respondents switched services once every 3.3 years, and the average farmer in this survey has tried about three different services.

Farmers in this survey may be divided into three groups, based on their use of MAS in different market conditions:

1) Those more likely to use market advisors as crop prices fall. These farmers tended to be the most risk-averse, with the highest belief in the risk-reducing properties of professional market services.

2) Those most likely to subscribe when crop prices are high. This group appears to be the most sensitive to the cost of professional market advice, and may be the least interested in such services of the three groups.

3) Those likely to subscribe regardless of market conditions. This group tended to have larger farms and larger gross sales.

Respondents indicated that professional market advisory services are used to the greatest extent for marketing information, market analysis, and to keep up with markets. Advisory services are more often used in an attempt to receive an above-average price than to reduce price and income risk and reduce price fluctuations.

General guidelines (ie, market strategies and price information) are utilized more than specific advice (ie, specific pricing decisions, price forecasts). Farmers appear to be cautious about using specific recommendations to make pricing decisions, as they indicated that they generally use recommendations as background information, compare it with other information sources and do not follow advice precisely. Only 11% of the farmers surveyed followed specific pricing recommendations of market advisory services closely.

Still, the impact of market advisory services on farmer pricing decisions is substantial for the entire group of users and very strong for those who identified themselves as close followers of professional market advice. Both groups are very likely to implement recommendations associated with the use of cash-market strategies, both before (in the form of cash forward contracts) and after harvest.

The next most popular pricing recommendations are buying call options and selling futures after harvest, for all users, and selling futures before and after harvest, for close followers. These are followed by buying put and call options prior to harvest for both groups. The use of both instruments may be indicative of sophisticated options positions, such as fences or window strategies.

The least favored recommendations for both groups were buying futures before and after harvest, and buying put options after harvest, which, interestingly enough, is a conventional hedging strategy. Overall, there is little difference between the two subgroups in terms of which types of recommendations they implement, only that close followers are significantly more likely to implement them.

The most valued features of the advisory service delivery process are daily updates of analyses and consistency of recommendations. Farmers appear to value recommendations that include futures and options more than recommendations that use only cash instruments. However, they seem more likely to follow cash-oriented recommendations. This discrepancy may be explained by the fact that all farmers have to sell their crops in the cash market, but not all of them use futures and options.

These data reveal that users of professional ag marketing services are generally more active marketers, as they use all of the selected forward-pricing techniques more than non-users. The smallest difference in use is for the simplest instruments, such as cash forward contracts. This difference increases for hedge-to-arrive contracts and almost doubles for the use of futures and options.

The use of forward-pricing techniques is even greater among close followers of market advisory services, particularly futures and options both before and after harvest and hedge-to-arrive contracts before harvest. These results indicate that users of market advisory services (especially close followers) are much more likely to use forward-pricing techniques, particularly futures and options, than non-users. This finding is consistent with the finding in previous studies that market advisory service use is an important determinant of the forward pricing behavior of farmers.

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List of Market Advisory Services at www.smallgrains.org

Scroll down and under “Useful Information and Links,” click on “Grain Market Advisor List.”  List is not comprehensive.