Top Producer:
Advanced Wheat Marketing
Kim’s web site
• agecon.okstate.edu/anderson
Marketing Efficiency
&
Efficient Marketing
“Economics is not an exact science.
It consists merely of laws of probability.
The prudent investor is one who
pursues a course of action which is
‘normally’ right and who avoids acts
and policies which are ‘normally’
wrong.”
L.L.B. Angus
Market Efficiency and
Efficient Marketing
Price = Supply, Demand
Market Efficiency and
Efficient Marketing
expected Supply,
Price = expected Demand
Market Efficiency and
Efficient Marketing
The efficient market
theory conceptualizes
markets as information.
Market Efficiency and
Efficient Marketing
When determining price, an
efficient market incorporates
all available information.
Market Efficiency and
Efficient Marketing
To earn a profit it is not enough
to know that price will change;
the direction in which price will
change must be known.
Market Efficiency and
Efficient Marketing
Profit, from marketing, is earned
by people or companies who
acquire relevant information
before anyone else.
Market Efficiency and
Efficient Marketing
Information by itself is not useful without
analysis that compares it with existing
information. Therefore earning profit
from marketing requires analyzing
existing information better than other
analysts.
Market Efficiency and
Efficient Marketing
Few people/companies consistently
earn large profits from pricing
decisions and these people earn
their profits from their information
and analysis.
Market Efficiency and
Efficient Marketing
1. Producers/lenders not obtain data
first.
2. Need bench-marks
3. Need volume to make marketing
effort worth the return.
4. Nearly impossible to predict
prices.
Market Efficiency and
Efficient Marketing
5. Make decisions based on probabilities.
Decisions based on what is normally
right and avoid what is normally
wrong.
Corn &Wheat
Situation and Outlook
Kim B. Anderson
Oklahoma State University
Policy comes and policy goes
but weather determines prices.
Luther Tweeten
Corn production area
Soybean production area
Cotton production area
HRW wheat production area
SRW wheat production area
Corn
Corn used for Ethanol
(billion bushels)
5.0
’09/10 4.3 bb
4.5
’08/09 4.0 bb
4.0
3.5
’07/08 3.2 bb
3.0
2.5
’06/07 2.1 bb
2.0
1.5
1.0
0.5
0.0
96
/9
7
98
/9
9
00
/0
1
02
/
03
04
/
06
08
10
12
14
16
/
/
/
/
/
/1
05
07
09
11
13
15
7
U.S. Corn Situation
Year
Planted
Acres
Harvested
Acres
Yield
(Million Bushels)
2000
2001
2002
2003
2004
2005
2006
2007
7-YR
Avg.
79.6
75.7
78.9
78.6
80.9
81.8
78.3
93.6
79.1
72.4
68.8
69.3
70.9
73.6
75.1
70.7
86.1
(91.0)
(90.9)
(87.8)
(90.2)
(91.0)
(91.8)
(90.3)
(92.0)
71.5
Percentage harvested in parenthesizes
Production
(Billion Bushels)
136.9
138.2
129.3
142.2
160.4
148.0
149.1
154.7
10.0
9.5
9.0
10.1
11.8
11.1
10.5
13.2
143.4
10.3
U.S. Corn Situation
Year
Ending
Production Consumption Stocks
U. S.
Price
(Billion Bushels)
2000
2001
2002
2003
2004
2005
2006
2007
7-YR
Avg.
10.0
9.5
9.0
10.1
11.8
11.1
10.5
13.2
9.6
9.8
9.5
10.2
10.6
11.1
11.4
12.6
2.1
1.6
1.0
1.0
2.2
2.0
1.3
1.9
$1.82
$1.85
$1.97
$2.30
$2.42
$2.06
$3.00
$3.50
10.3
10.3
1.6
$2.20
World Corn Situation
Year
Production
Consumption
Ending
Stocks
(Billion Bushels)
2000
2001
2002
2003
2004
2005
2006
2007
7-YR
Avg.
23.2
23.6
23.7
24.3
27.8
27.3
27.6
30.3
23.8
24.5
24.7
25.5
26.9
27.3
28.5
30.1
6.0
5.8
4.9
4.1
5.1
4.8
4.1
3.9
25.4
25.9
4.8
2008 Corn Production
2007 use + ethanol increase – 1 bb ending
stocks = required production ÷ yield =
acres harvested ÷ % harvested =
required planted acres
12.6 bb + 0.7 bb – 1 bb = 12.3 bb ÷ 153 bu/ac
= 80 ma ÷ .91 = 88 million acres
CBT Corn Monthly Nearest
Weather
Before ethanol
Ethanol
CBT Soybeans Monthly Nearest
Before ethanol
Weather
& bio-diesel
Ethanol
& bio-diesel
Key points
 2007 corn production 13.2 billion bushels (bb).
 2007 corn use 12.6 bb.
2007 ethanol corn use 3.2 bb.
2008 projected ethanol corn use 3.9 bb.
 corn end stocks ~ 1.9 bb  $3.50 avg. annual price.
 corn end stocks ~ 1.0 bb  $3.90 avg. annual price.
2008 planted acres 88 mil., production of 12.3 bb,
ending stocks 1.0 bb & $3.70 avg. annual price.
Wheat
U.S. Wheat Situation
Year
Planted
Acres
Harvested
Acres
Yield
(Million Bushels)
2000
2001
2002
2003
2004
2005
2006
2007
7-YR
Avg.
62.5
59.4
60.3
62.1
59.7
57.2
57.3
60.4
59.9
53.1
48.5
45.8
53.1
50.0
50.1
46.8
51.0
(85.0)
(81.6)
(76.0)
(85.5)
(83.8)
(87.6)
(81.7)
(84.4)
49.8 (83.2)
Percentage harvested in parenthesizes
Production
(Billion Bushels)
42.0
40.2
35.0
44.2
43.2
42.0
38.7
40.5
2.23
1.95
1.61
2.34
2.26
2.10
1.81
2.07
40.7
2.00
U.S. Wheat Situation
Year
Ending
Production Consumption Stocks
U. S.
Price
(Billion Bushels)
2000
2001
2002
2003
2004
2005
2006
2007
7-YR
Avg.
2.23
1.50
1.61
2.34
2.16
2.11
1.80
2.07
2.39
2.15
1.99
2.35
2.24
2.16
2.05
2.30
.873
.777
.492
.546
.540
.571
.456
.312
$2.62
$2.78
$3.56
$3.40
$3.40
$3.42
$4.26
$6.10
1.96
2.19
.608
$3.35
13.6%
World Wheat Situation
Year
Production
Consumption
Ending
Stocks
(Billion Bushels)
2000
2001
2002
2003
2004
2005
2006
2007
7-YR
Avg.
21.4
21.3
20.8
20.4
23.0
22.9
21.8
22.2
21.5
21.5
22.2
21.6
22.3
23.1
22.7
22.7
7.4
7.4
6.2
4.8
5.5
5.4
4.6
4.0
21.7
22.1
5.9
17.8%
KCBT Monthly Nearest
Ethanol
Weather
Before ethanol
KCBT March ‘08
KCBT July “08
U.S. Wheat Supply and Use
USDA
07/08
Kim’s
08/09
million bushels
Beginning stocks
Production
Supply, Total
Exports
Use, Total
Ending Stocks
Avg. farm price
456
2,067
2,608
1,150
2,301
307
$6.10
307
2,350
2,657
1,050
2,250
407
$5.20
June 2008 wheat delivery prices
• KCBT July wheat contract price
• Elevator forward contract basis
• Forward contract offer
• Buy KCBT July 800 call
• FC/Call minimum price
$7.98
-$0.53
$7.45
-$0.70
$6.75
• Buy KCBT July 800 Put (800¢ - 70¢) $7.30
• Expected June 2008 basis
$0.45
• Expected minimum price
$6.85
Key Points
Weather is the major price factor.
Corn continues to set the floor for wheat prices.
 U.S. and world wheat stocks below average.
 Wheat planted acres increase ~5% (63 ma).
 Wheat stocks increase in 2008/09 – below avg.
 2008/09 wheat price range $3.75 to $8.50.
 June 2008 wheat price ~ $6.00 $4.50 to $8.50.
http://www.agecon.ksu.edu/
kdhuyvetter/KD_Papers.htm
The Performance of Market Advisory
Services in Wheat
Ryan M. Batts, Scott H. Irwin, and
Darrel L. Good
Pricing Performance Results, Wheat ’95 – ’99
96
97
98
99
’95-’99
Mkt. Benchmark 3.61
3.95
3.22
2.90
2.68
3.27
Average of
Services
3.79
3.82
2.63
2.36
2.64
3.06
# Above
Average
14/24
9/23
4/20
1/21
5/23
0/17
+18
-13
-59
-54
-4
-21
95
Average Gain
or Loss
Pricing Performance Results, Corn ’95 – ’00
95
96
97
98
99
00
2.90
2.65
2.33
2.24
2.05
2.09
Average of
Services
3.03
2.63
2.32
2.17
2.02
2.13
# Above
Average
18/25
9/26
11/25 7/23
14/26
15/27
+13
-2
-1
-3
+4
Mkt.
Benchmark
Average Gain
or Loss
-7
Pricing Performance Results, Corn ’95 – ’00
01
02
03
’95-’03
2.00
2.10
2.23
2.29
Average of
Services
1.99
2.15
2.24
2.29
# Above
Average
11/27
14/27
13/26
13/26
Average Gain
or Loss
-1
+5
-1
Mkt.
Benchmark
0
Pricing Performance Results, Beans ’95 – ’00
95
96
97
98
99
00
Mkt.
Benchmark
6.26
7.08
6.30
5.86
5.50
5.42
Average of
Services
6.59
7.27
6.38
5.82
5.67
5.45
# Above
Average
21/25
13/24
13/23
7/22
16/25
12/26
+21
+8
-4
+17
+3
Average Gain
+33
or Loss
Pricing Performance Results, Beans ’95 – ’00
’95-’03
01
02
03
5.34
4.98
5.95
5.85
Average of
Services
5.45
5.24
6.22
5.99
# Above
Average
18/26
22/26
17/26
Average Gain
or Loss
+11
+26
+27
Mkt.
Benchmark
+14
What is Your Greatest Source of
Satisfaction as a Farmer?
Planning and Growing Crops
45%
Operating or Repairing Machinery 20%
Working with Livestock
13%
Other
10%
Management and Finance
8%
Marketing and Buying
4%
Source: Online Poll, agriculture.com, July 14, 2005
Many Farmers Turn to Market Advisory
Services for Help
• Numerous surveys highlight
the popularity of market
advisory services among
farmers
• Research shows that
advisory services have
substantial influence on the
use of forward pricing by
farmers
A typical advisory service
performance claim:
“Marketing has always
been a difficult task;
however, we believe
our time tested
program of cash sales,
along with option
strategies, can help
you consistently
approach the
reasonable goal of
marketing your crop
and livestock in the
TOP THIRD of prices
that are available to
you in any year.”
Market Advisory Services
• Central focus is to provide
farmers with market
information, analysis and
specific marketing
recommendations
• Recommendations may
involve:
– Cash market transactions
– Forward market
transactions
– Futures contract positions
– Options contract positions
Types of Advisory Service Programs
• Basic program: provides
subscribers with market
analysis, information and
generic marketing
recommendations
• Customized program:
provides marketing
recommendations that are
tailored to individual client
needs, direct access to
market analysts, in
addition to basic services
Cost:
$150$1,500/year
Cost:
3-5¢/bushel
HRW Net Advisory Prices, 1995-2004
Crop Years
Net Advisory Price ($/bu.)
6.00
5.00
4.00
3.00
2.00
1.00
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Crop Year
Average Pricing Performance of Advisory
Programs in HRW, 1995-2004 Crop Years
3.25
3.20
3.20
HRW Price ($/bu.)
3.15
3.11
3.10
3.07
3.05
3.05
3.02
3.00
2.95
2.90
Advisors
24-mo.
16-mo.
Harvest
Benchmarks
Farmer
HRW Winner-Loser Results for all Pairs
of Non-Overlapping Crop Years,
1995-2004
Winner Year 2 Loser Year 2
Winner Year 1
56%
44%
Loser Year 1
46%
54%
100%
100%
Based on Fisher’s Exact Test, cell counts
are insignificantly different from a
random distribution
“Longer-Term” Predictability by Groups
Performance Group
in 1995-1998
Top Third
Middle Third
Bottom Third
Top Third minus Bottom Third
Top Fourth
Second Fourth
Third Fourth
Bottom Fourth
Top Fourth minus Bottom Fourth
Top Two Programs
Bottom Two Programs
Top Two minus Bottom Two
Average Average
Price
Price
1995-1999 2001-2004
---$/bu.--3.35
2.97
3.13
2.99
2.84
3.10
Average Average
Revenue Revenue
1995-1999 2001-2004
---$/ac.--119
101
111
100
102
104
0.51
-0.13
17
-2
3.40
3.21
3.01
2.77
3.01
2.96
3.05
3.07
121
113
106
101
101
100
103
103
0.63
-0.06
20
-2
3.49
2.75
2.98
3.02
125
100
101
102
0.74
-0.05
25
-1
Conclusions
• No evidence that advisory services
consistently perform in the top-third
of the price range in wheat
• No evidence that advisory services
consistently beat market or farmer
benchmarks in wheat
• No evidence that pricing
performance of advisory services in
wheat can be predicted across crop
years
Why is the performance of advisory
programs so poor in wheat?
Performance Summary
1. Supports “Efficient Market Hypothesis.”
2. Can’t predict wheat prices.
3. 41% chance of winning corn advisory firm.
4. Nearly zero percent chance for wheat.
Mechanical Marketing
Strategies
Kim B. Anderson
Oklahoma State University
H:/anderso/compserv/mechmktg.ppt
Pre-harvest Marketing Strategies
Wheat
Crop Year
Sell
20-Jun
1-Apr FC
+
20-Jun Ave
1-Apr
Hedge
Offset 20-Jun
1-Apr Buy @$
Put/Offset &
Sell 20-Jun
1-Apr FC +
Buy @$ Call
Offset 20-Jun
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2.20
2.33
3.58
3.84
2.91
2.52
3.26
2.47
2.98
3.74
5.47
3.09
2.61
2.28
2.53
2.79
2.72
2.72
3.40
3.17
2.17
2.31
3.11
3.75
2.99
2.58
3.27
2.60
2.95
3.42
5.18
3.38
2.79
2.42
2.57
2.88
2.87
2.70
3.61
3.05
2.24
2.30
2.72
3.81
3.08
2.68
3.28
2.64
2.90
3.05
4.77
3.58
2.87
2.57
2.42
2.84
3.02
2.73
3.60
3.10
2.18
2.23
3.29
3.64
3.01
2.56
3.12
2.59
2.95
3.59
5.19
3.36
2.73
2.43
2.38
2.74
2.73
2.67
3.49
3.07
2.05
2.20
3.29
3.51
2.98
2.52
3.12
2.64
2.98
3.64
5.31
3.44
2.87
2.39
2.53
2.85
2.80
2.65
3.49
3.02
H:/anderso/compserv/mechmktg.ppt
Pre-harvest Marketing Strategies
Wheat
Crop Year
96-05
Avg
Sell
20-Jun
3.11
1-Apr FC
+
20-Jun Ave
3.14
86-05
3.04 3.03
Avg
1-Apr
Hedge
Offset 20-Jun
1-Apr Buy @$
Put/Offset &
Sell 20-Jun
1-Apr FC +
Buy @$ Call
Offset 20-Jun
3.14
3.10
3.14
3.01
3.01
3.01
H:/anderso/compserv/mechmktg.ppt
Post-harvest Marketing Strategies
Wheat
Crop Year
Sell
20-Jun
Net
15-Oct
Sell 1/3
20-Jun;15-Oct
& 15-Dec
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2.20
2.33
3.58
3.84
2.91
2.52
3.26
2.47
2.98
3.74
5.47
3.09
2.61
2.28
2.53
2.79
3.00
2.72
3.40
3.17
2.09
2.40
3.52
3.52
2.19
3.06
3.01
2.80
3.64
4.59
3.98
3.23
2.47
1.97
2.60
2.42
4.35
2.99
3.13
3.38
2.13
2.44
3.52
3.61
2.37
2.98
3.12
2.87
3.33
4.30
4.35
3.04
2.47
2.00
2.51
2.53
3.70
3.05
3.25
3.27
Sell 20-Jun
Buy @$ Call
Offset 15-Nov
Net
Storage
& Hedge
2.11
2.31
3.11
3.64
2.77
3.00
3.04
3.00
3.22
4.41
5.12
2.87
2.43
2.05
2.32
2.61
3.80
2.18
3.12
2.93
2.00
2.11
3.59
3.78
2.93
2.44
3.21
2.43
2.89
3.58
4.96
3.07
2.64
1.98
2.68
2.91
3.02
2.85
3.64
3.14
H:/anderso/compserv/mechmktg.ppt
Post-harvest Marketing Strategies
Wheat
Crop Year
96-05
Avg
Sell
20-Jun
3.11
Net
15-Oct
3.05
86-05
Avg 3.04 3.07
Sell 1/3
20-Jun;15-Oct
& 15-Dec
Sell 20-Jun
Buy @$ Call
Offset 15-Nov
Net
Storage
& Hedge
3.01
3.04
3.07
3.04
3.05
2.98
H:/anderso/compserv/mechmktg.ppt
Oklahoma Monthly Avg. Price:
June 1997 – May 2005
$3.20
Actual Price
$3.00
$2.80
Price - Carry
$2.60
$2.40
$2.20
$2.00
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
H:/anderso/compserv/mechmktg.ppt
Oklahoma Monthly Avg. Price:
June 1985 – May 2005
$3.40
Actual Price
$3.30
$3.20
$3.10
Price - Carry
$3.00
$2.90
$2.80
$2.70
$2.60
$2.50
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
H:/anderso/compserv/mechmktg.ppt
Conclusions
• Mechanical strategies will produce a relatively good
net price for a minimum amount of effort.
• The differences between one marketing strategy and
another are small.
• The good news for producers that enjoy marketing
and that enjoy keeping up with price trends, cycles
and patterns is that efforts to “beat the market” will,
on average, only cost a few cents a bushel.
Conclusions
• How sell wheat (crops)?
• Mechanical marketing strategies.
• Merchandise
H:/anderso/compserv/mechmktg.ppt
Merchandising
&
Merchandising Risk
Merchandising
Commercial
On-Farm
Elevator
Elevator
Quality
Quality
Timing
Timing
Merchandising Risk
Commercial
On-Farm
Elevator  Manager
Elevator  Delivery
Quality  Established
Quality  Grades
Timing  Carry
Timing  Carry
Merchandising
1. Takes time from other management activities.
2. Must allocate time to highest payoff.
Proof that Oklahoma Wheat Producers
Do A Good Job of Marketing
Dr. Kim Anderson & Dr. Wade Brorsen
Department of Agricultural Economics
Oklahoma State University
Stillwater, Oklahoma
“Most producers
sell in the bottom
one - third of the
market”
Objective
Estimate the percentage of
Oklahoma wheat producers
that received a net price in
the bottom third of the
market
Data: June 1992 through May 2001
Elevator 1
Location: Southern, OK
Size:
1.2 m.b./yr.
Transactions:
1572/yr.
Elevator 2
Elevator 3
Central, OK
1.25 m.b./yr.
789/yr.
Northern, OK
2.3 m.b./yr.
837/yr.
Oklahoma Crop Reporting Service
Daily Price Quotes
All prices were adjusted for storage and
interest.
Storage: $0.00085/Day
Interest: Prime + 2%.
Average Price Received
1992-2001
Oklahoma
Producer
Elevator 1
$3.03
$3.39
Elevator 2
$2.96
$3.05
Elevator 3
$3.02
$3.13
Percent of sales in bottom 1/3
1/3
Elevator 1
Elevator 2
Elevator 3
24%
20%
20%
Percent of sells in top 2/3, 1/2
or 1/3 of market.
Elevator 1
Elevator 2
Elevator 3
2/3
76%
80%
80%
1/2
63%
67%
66%
1/3
53%
49%
49%
Percentage of Bushels Sold by Month
Month
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Elevator 1
56%
9%
3%
2%
3%
3%
3%
3%
2%
5%
2%
9%
Elevator 2
25%
15%
6%
6%
8%
5%
7%
9%
6%
6%
3%
4%
Elevator 3
8%
7%
7%
8%
16%
6%
4%
5%
9%
10%
8%
11%
Percent of wheat sold by Jan 1
Month
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total
Elevator 1
56%
9%
3%
2%
3%
3%
3%
79%
Elevator 2
25%
15%
6%
6%
8%
5%
7%
72%
Elevator 3
7%
8%
6%
31%
5%
5%
6%
68%
Conclusions
 Only 20-25% of sales in bottom third
of market.
 Nearly 50% of sales in top third of
market.
 Producers doing relatively good job of
marketing wheat.
What you learned tonight
What makes prices change.
Management practices that improve profit.
Accuracy of price predictions
Mechanical marketing strategies
Merchandising
Proof that producers do a relatively good
job of marketing.
Marketing mysteries revealed
January 16
• Understand how price is determined.
• Understand how marketing system
functions.
• Understand how merchandisers use basis,
futures contracts and option contracts.
• Understand how basis, futures contracts
and option contracts may help you.
Kim’s web site
• agecon.okstate.edu/anderson