Evaluation of Market Advisory Service Performance in Hogs by

The purpose of this paper is to investigate the pricing performance of agricultural market advisory services in hogs. Pricing recommendations are available for all quarters from the beginning of 1995 through the end of 2001. The results show that average differences between advisory programs and market benchmarks are small in nominal terms for all three benchmarks, -$0.41/cwt., $0.00/cwt. and -$0.27/cwt. versus the cash, index and empirical benchmarks, respectively, and none of the average differences are significantly different from zero. Hence, advisory programs as a group do not outperform the market benchmarks in terms of average price. Advisory programs also do not outperform the market benchmarks in terms of average price and risk. Finally, there is little evidence that advisory programs with superior performance can be usefully selected based on past performance in the hog market. The Performance of Agricultural Market Advisory Services in Hogs Management of price volatility is an important aspect of business for hog producers. Hog price variability is often the highest rated source of income variability identified by producers (e.g., Patrick, et al.). While vertical integration and contracting have increased rapidly in recent years, at least partially in response to price risk, over 70% of producers still use cash market sales to some extent (Patrick, et al.). Consequently, price risk management is still a major concern for producers. One approach to managing this risk is the use of market advisory services. For a subscription fee, these services give specific recommendations to producers on how and when to price their production. Despite the popularity of market advisory services among livestock producers (e.g., Schroeder, et al.), there is no evidence regarding the performance of these services in livestock markets. Previous studies of market advisory service performance have been limited to grain markets (Gehrt and Good; Martines-Filho; Jirik et al.; Irwin, MartinesFilho and Good). The evidence in these studies suggests a limited ability to outperform the market in corn and soybeans and no ability in wheat. It is not known whether the results generalize to livestock commodities. Livestock marketing is quite different from grain marketing, due to the non-storable nature of livestock and relatively constant production through time. It is therefore reasonable to argue that different marketing strategies may be optimal in livestock markets, as compared to grains. Hence, market advisory service performance may be different in livestock markets. The purpose of this paper is to investigate the pricing performance of agricultural market advisory services for hogs. Following Irwin, Martines-Filho and Good two key performance questions will be addressed: 1) Do market advisory services, on average, outperform an appropriate hog market benchmark? and 2) Do market advisory services exhibit persistence in their performance in the hog market over time? The data for the study is provided by the Agricultural Market Advisory Service (AgMAS) Project. Pricing recommendations are available for all quarters from the beginning of 1995 through the end of 2001. This 28 quarter sample should be large enough to provide a reasonably reliable estimate of true market advisory service performance in the hog market. Also, the sample period is characterized by large variation in hog prices, ranging from the relatively high prices of 1996 to the drastic price drop of late 1998. Since the AgMAS Project subscribes to all of the services and collects "real-time" recommendations, the data is not subject to survivorship bias. Finally, while the sample of advisory services is non-random, it is constructed to be generally representative of the majority of advisory services offered to hog producers. The procedure used to compute net hog prices for each advisory program is similar to the procedure used in earlier AgMAS Reports (e.g., Irwin, Martines-Filho and Good). In particular, after the stream of recommendations is collected for hogs in a particular quarter, the net price that would have been received by a hog producer who precisely follows the set of pricing recommendations is computed. Since cash hog pricing recommendations are often limited and quite short-run in nature, the same cash marketing strategy will be assumed for all services. Therefore, the net advisory price will be computed as the quarterly average cash sale price plus or minus gains/losses and brokerage costs associated with futures and options transactions. The first performance test compares the average price of advisory programs and benchmarks. The second compares both the average price and risk of advisory programs and benchmarks. The third evaluates the predictability of advisory program performance from period-to-period. Three market benchmarks are developed for the evaluations. Market Advisory Service Recommendations The AgMAS Project was initiated in 1994 with the goal of providing unbiased and rigorous evaluation of market advisory services. Five criteria have been used to determine which advisory services are included in the AgMAS study. First, marketing recommendations from an advisory service must be received electronically in real time. Second, a service has to provide marketing recommendations to hog producers rather than (or in addition to) speculators or “traders.” Third, marketing recommendations from an advisory service must be in a form suitable for application to a representative hog producer. That is, the recommendations have to specify the percentage of hog production involved in each transaction ---futures or options--and the price or date at which each transaction is to be implemented. Fourth, advisory services must provide “blanket” or “one-size fits all” marketing recommendations so there is no uncertainty about implementation. Fifth, a candidate service must be a viable, commercial business. The original sample of market advisory services was drawn from the list of Premium Services available from the two major agricultural satellite networks, Data Transmission Network (DTN) and FarmDayta, in the summer of 1994. While the list of advisory services available from these networks was by no means exhaustive, it did have the considerable merit of meeting a market test. Presumably, the services offered by the networks were those most in demand by farm subscribers to the networks. In addition, the list of available services was cross-checked with other farm publications to confirm that widely followed advisory firms were included in the sample. It seems reasonable to argue that the resulting sample of services was generally representative of the majority of advisory services available to farmers. Additions and deletions to the sample of advisory services have occurred over time. Additions largely have been due to the increasing availability of market advisory services via alternative means of electronic delivery, in particular, websites and e-mail. Deletions have occurred for a variety of reasons. A total of 15 advisory service programs for hogs have been included in the sample at some point in time. Table 1 contains the complete list of advisory programs and includes a brief explanation why each program not included for all marketing quarters is added or deleted from the sample. The term “advisory program” is used because one advisory service has more than one distinct marketing program for hogs (AgriVisor). Three forms of survivorship bias may be potential problems when assembling an advisory program database. Survival bias significantly biases measures of performance