The net advisory prices and benchmarks computed by the AgMAS Project are
designed to reflect "real-world" marketing conditions and assure that net
advisory service prices and benchmarks are computed on a rigorously comparable
basis. This latter point is especially important, as performance evaluations
must compare "apples to apples" and not "apples to oranges." Comparison
problems may arise if prices computed by an individual farmer, or another market
advisory service, are compared to AgMAS net advisory prices and benchmarks.
First, and foremost, AgMAS net advisory prices and benchmarks are stated on a
harvest equivalent basis. This means that spot cash prices for post-harvest
sales are adjusted for storage costs, which include physical storage charges,
shrinkage charges and interest opportunity costs. The impact of this assumption
is illustrated in the top panel of Figure 4 for corn and the bottom panel for
soybeans. The top line in each chart shows the 2000 harvest cash price for each
crop (corn: $1.64 per bushel; soybeans: $4.56 per bushel). The bottom line
reflects a cash sale at the same harvest price one to eleven months after
harvest, with the cash price adjusted for commercial costs of storage. As a
specific example, consider a six-month storage horizon for corn. In this case,
the cash price of the sale six-months after harvest is assumed to be $1.64 per
bushel, the same as the harvest cash price (equivalent to saying cash prices do
not change over the six-month storage period). However, the harvest equivalent
price for the sale six months after harvest is only $1.34 per bushel after
adjusting for commercial storage costs. Thus, the difference between unadjusted
and adjusted post-harvest prices in this example is 30¢ per bushel, a
substantial difference by any standard. The magnitude of the difference is
larger for longer storage horizons and for soybeans relative to corn. Note also
that the difference will not be as large if on-farm variable costs of storage
are assumed instead of commercial costs.
This discussion should make clear the potential pitfalls in comparing the
unadjusted average cash price for an individual farmer or another market
advisory service to the harvest equivalent advisory prices and benchmarks
computed by the AgMAS Project. If such a comparison is made, it is not
difficult to imagine a scenario where it is mistakenly concluded that the
performance of the farmer or market advisory service is superior to the advisory
services, market benchmarks and farmer benchmarks included in the AgMAS
Project.
Second, AgMAS evaluations assume a particular geographic location.
Specifically, the evaluation is designed to reflect conditions facing a
representative central Illinois corn and soybean farmer. This means comparisons
made by farmers or advisory services in other areas of the US may not be valid,
because yields and basis patterns may be quite different. The differences in
yields and basis patterns could have a substantial impact on prices computed for
farmers or advisory services in another area. The resulting bias could be
either up or down relative to AgMAS advisory prices and benchmarks, depending on
local conditions.
Third, wherever feasible, marketing loan recommendations from advisory
programs are followed by the AgMAS Project. Consequently, marketing loan
payments or benefits are incorporated into net advisory prices. Market and
farmer benchmark prices also include marketing loan payments or benefits.
Hence, it would not be appropriate to compare prices for individual farmers or
another market advisory service if marketing loan payments or benefits are not
included in the prices or included in some other way.
In sum, it is inappropriate to directly compare prices for individual farmers
or another market advisory service to AgMAS net advisory prices or benchmarks
unless the same assumptions are used. To make valid comparisons, AgMAS
assumptions regarding storage costs, yield, basis, and marketing loans have to
be applied.
