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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher 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.
Length: Date of creation: 2003 Date of revision: Handle: RePEc:ags:uiucrr:14774
Contact details of provider: Postal: 326 Mumford Hall, MC-710, 1301 West Gregory Drive, Urbana, Illinois, 61801 Phone: (217) 333-1810 Fax: (217) 333-5538 Email: Web page: http://www.ace.uiuc.edu/ More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (AgEcon Search).
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)