Market Efficiency and Marketing to Enhance Income of Crop Producers

Recent changes in farm policy have renewed interest in using marketing strategies based on futures and options markets to enhance the income of field crop producers. This article reviews the main concepts and associated empirical research of the dominant academic theory concerning the behavior of futures and options markets, namely, the efficient market hypothesis. This rich conceptual and empirical base provides several important insights. One is that, although individuals can beat the market, few can consistently do so. This insight is consistent with Grossman and Stiglitz's model of market efficiency, in which individuals who consistently earn trading returns have superior access to information or superior analytical ability. One implication is that, with few exceptions, the crop producers who survive will be those with the lowest cost of production because efforts to improve revenue through better marketing will have limited success. Some successful marketing strategies do appear to exist, but generally they are based on using the market as a source of information. One example is to base storage decisions on whether the current basis exceeds the cost of storage and then to use hedging to ensure an expected positive return.