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Efficiency Analysis of Agricultural Market Advisory Services: A Nonlinear Mixed-Integer Programming Approach

  • Silvina M. Cabrini

    ()

    (Department of ACE, University of Illinois at Urbana-Champaign, 305 Mumford Hall, Urbana, Illinois 61822)

  • Brian G. Stark

    ()

    (Department of ACE, University of Illinois at Urbana-Champaign, 305 Mumford Hall, Urbana, Illinois 61822)

  • Hayri Önal

    ()

    (Department of ACE, University of Illinois at Urbana-Champaign, 305 Mumford Hall, Urbana, Illinois 61822)

  • Scott H. Irwin

    ()

    (Department of ACE, University of Illinois at Urbana-Champaign, 305 Mumford Hall, Urbana, Illinois 61822)

  • Darrel L. Good

    ()

    (Department of ACE, University of Illinois at Urbana-Champaign, 305 Mumford Hall, Urbana, Illinois 61822)

  • João Martines-Filho

    ()

    (Department of ACE, University of Illinois at Urbana-Champaign, 305 Mumford Hall, Urbana, Illinois 61822)

Professional market advisory services provide specific advice (advisory programs) to grain producers on how to market their commodities, and assist them in their efforts to manage price risk. Previous studies analyzed the effectiveness of individual services and could find only weak evidence that these services help farmers improve their returns beyond market prices. The present study applies portfolio theory to determine an efficient combination of advisory programs using a nonlinear integer programming framework. The optimization results provide some evidence that an efficient portfolio provides significantly greater risk and return benefits compared to individual programs and external benchmarks. In a holdout period analysis, efficient portfolios have superior average return performance, but they fail to dominate the relevant benchmarks in terms of mean and variance. However, these out-of-sample results should be considered cautiously, given the small number of observations available.

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File URL: http://dx.doi.org/10.1287/msom.1040.0043
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Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

Volume (Year): 6 (2004)
Issue (Month): 3 (December)
Pages: 237-252

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Handle: RePEc:inm:ormsom:v:6:y:2004:i:3:p:237-252
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  1. Irwin, Scott H. & Martines-Filho, Joao Gomes & Good, Darrel L., 2003. "The Pricing Performance Of Market Advisory Services In Corn And Soybeans Over 1995-2001: A Non-Technical Summary," AgMAS Project Research Reports 14770, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  2. William F. Sharpe, 1963. "A Simplified Model for Portfolio Analysis," Management Science, INFORMS, vol. 9(2), pages 277-293, January.
  3. Frankfurter, George M. & Phillips, Herbert E. & Seagle, John P., 1976. "Performance of the Sharpe Portfolio Selection Model: A Comparison," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(02), pages 195-204, June.
  4. Martines-Filho, Joao Gomes & Irwin, Scott H. & Good, Darrel L. & Cabrini, Silvina M. & Stark, Brian G. & Shi, Wei & Webber, Rick L. & Hagedorn, Lewis A. & Williams, Steven L., 2003. "Advisory Service Marketing Profiles For Soybeans Over 1995-2000," AgMAS Project Research Reports 14791, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  5. Irwin, Scott H. & Martines-Filho, Joao Gomes & Good, Darrel L., 2003. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2001," AgMAS Project Research Reports 37510, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  6. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  7. Pennings, Joost M.E. & Good, Darrel L. & Irwin, Scott H. & Gomez, Jennifer K., 2001. "The Role Of Market Advisory Services In Crop Marketing And Risk Management: A Preliminary Report Of Survey Results," AgMAS Project Research Reports 14772, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  8. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
  9. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  10. George F. Patrick & Stanton Ullerich, 1996. "Information sources and risk attitudes of large-scale farmers, farm managers, and agricultural bankers," Agribusiness, John Wiley & Sons, Ltd., vol. 12(5), pages 461-471.
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