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Portfolios Of Agricultural Market Advisory Services: How Much Diversification Is Enough?

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  • Stark, Brian G.
  • Cabrini, Silvina M.
  • Irwin, Scott H.
  • Good, Darrel L.
  • Martines-Filho, Joao

Abstract

Agricultural market advisory services offer specific advice to farmers on how to market their commodities. Farmers can subscribe to one or more of these services and follow their advice as a way of managing price risk. According to portfolio theory, a combination of these services may have risk/return benefits compared to individual services. This report analyzes the potential risk reduction gains from naïve diversification among market advisory services for corn and soybeans. Results show that increasing the number of (equal-weighting) services reduces portfolio expected risk, but the marginal decrease in risk from adding a new service decreases rapidly with portfolio size. The risk reduction benefits of naïve diversification among advisory services is relatively small compared to the results obtained in previous studies for stock portfolios, and this is mainly because advisory prices, on average, are highly correlated. A one service portfolio has only a 20%, 16% and 32% higher expected standard deviation than the minimum risk naïve portfolio for corn, soybeans and 50/50 revenue, respectively. Most risk reduction benefits are achieved with small portfolios. For instance, a four service portfolio has only 5%, 4% and 9% higher expected standard deviation than the minimum risk naïve portfolio for corn, soybeans and 50/50 revenue, respectively. Based on these results, there does not appear to be strong justification for farmers adopting portfolios with a large number of advisory services. Farmers may well choose portfolios with as few as two or three programs, since the relatively high total subscription costs associated with larger portfolios can be avoided while obtaining most of the benefits from diversification.

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Bibliographic Info

Paper provided by University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics in its series AgMAS Project Research Reports with number 14774.

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Date of creation: 2003
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Handle: RePEc:ags:uiucrr:14774

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Keywords: Marketing;

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References

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  1. Good, Darrel L. & Martines-Filho, Joao & Irwin, Scott H., 2002. "The Pricing Performance Of Market Advisory Services In Corn And Soybeans Over 1995-2000," AgMAS Project Research Reports, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics 14784, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  2. Webber, Rick L. & Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao, 2003. "Evaluation Of Market Advisory Service Performance In Hogs," 2003 Conference, April 21-22, 2003, St. Louis, Missouri, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management 18980, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  3. Ron Bird & Mark Tippett, 1986. "Note---Naive Diversification and Portfolio Risk---A Note," Management Science, INFORMS, INFORMS, vol. 32(2), pages 244-251, February.
  4. Schroeder, Ted C. & Parcell, Joseph L. & Kastens, Terry L. & Dhuyvetter, Kevin C., 1998. "Perceptions Of Marketing Strategies: Producers Versus Extension Economists," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(01), July.
  5. Sharpe, William F., 1967. "Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 2(02), pages 76-84, June.
  6. Isengildina, Olga & Pennings, Joost M.E. & Irwin, Scott H. & Good, Darrel L., 2004. "Crop Farmers’ Use of Market Advisory Services," AgMAS Project Research Reports, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics 37489, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
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Cited by:
  1. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  2. Irwin, Scott H. & Martines-Filho, Joao & Good, Darrel L., 2003. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2001," AgMAS Project Research Reports, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics 37510, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  3. Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao & Batts, Ryan M., 2006. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2004," AgMAS Project Research Reports, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics 37513, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.

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