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Market Efficiency and Marketing to Enhance Income of Crop Producers

  • Carl R. Zulauf

    (The Ohio State University)

  • Scott H. Irwin

    (The University of Illinois at Urbana-Champaign)

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 literature surrounding the dominant academic theory of the behavior of futures and options markets, the efficient market hypothesis. The following conclusion is reached: while individuals can beat the market, few can consistently do so. This conclusion 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 since efforts to improve revenue through better marketing will have limited success. There do appear to be some successful marketing strategies. One is to base storage decisions on when a producer harvests the crop relative to the national harvest of the crop. Another is to base storage decisions on whether the current basis exceeds the cost of storage, and then to use hedging to assure an expected positive return.

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Paper provided by EconWPA in its series Finance with number 9711004.

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Length: 47 pages
Date of creation: 19 Nov 1997
Date of revision:
Handle: RePEc:wpa:wuwpfi:9711004
Note: Type of Document - pdf; prepared on PC; to print on HP Laserjet; pages: 47; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 97-04. For a complete list of OFOR working papers see
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  2. LeRoy, Stephen F, 1989. "Efficient Capital Markets and Martingales," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1583-1621, December.
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  4. Kastens, Terry L. & Schroeder, Ted C., 1996. "Efficiency Tests Of July Kansas City Wheat Futures," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(02), December.
  5. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
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  8. Bessembinder, Hendrik & Chan, Kalok, 1992. "Time-varying risk premia and forecastable returns in futures markets," Journal of Financial Economics, Elsevier, vol. 32(2), pages 169-193, October.
  9. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
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  14. Hartzmark, Michael L, 1987. "Returns to Individual Traders of Futures: Aggregate Results," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1292-1306, December.
  15. Thompson, Sarahelen R. & Waller, Mark L., 1987. "The Execution Cost of Trading in Commodity Futures Markets," Food Research Institute Studies, Stanford University, Food Research Institute, issue 02.
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  17. Allen, P. Geoffrey, 1994. "Economic forecasting in agriculture," International Journal of Forecasting, Elsevier, vol. 10(1), pages 81-135, June.
  18. Garcia, Philip & Hudson, Michael A. & Waller, Mark L., 1988. "The Pricing Efficiency Of Agricultural Futures Markets: An Analysis Of Previous Research Results," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 20(01), July.
  19. Tomek, William G., 1987. "Effects of Futures and Options Trading on Farm Incomes," Staff Papers 186718, Cornell University, Department of Applied Economics and Management.
  20. Scott H. Irwin & Carl R. Zulauf & Thomas E. Jackson, 1996. "Monte Carlo Analysis of Mean Reversion in Commodity Futures Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 387-399.
  21. Phillips, Gordon M & Weiner, Robert J, 1994. "Information and Normal Backwardation as Determinants of Trading Performance: Evidence from the North Sea Oil Forward Market," Economic Journal, Royal Economic Society, vol. 104(422), pages 76-95, January.
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