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Abstract
Recent changes in farm policy have renewed interest in using marketing strategies based on futures and options markets to enhance the income of 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. Those few who consistently earn trading returns have superior access to information or superior analytical ability. This conclusion is consistent with Grossman and Stiglitz's model of market performance when information is costly. One implication is that if any "expert" offers advice on taking a futures or options position, first ask for a statement of their past trading record. To follow on, we recommend that reporting of actual performance be required by the Commodity Futures Trading Commission. A second implication is the importance of cost of production relative to marketing in determining the long term survival of crop producers. With very 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. Thus, a good marketing program starts with a good program for managing and controlling cost of production. However, all is not lost for the individual crop producer when it comes to enhancing income from prudent marketing. Simple strategies exist which can enhance average return. These strategies use the market as a source of information, rather than as a trading medium. An example is to base storage decisions on whether the current basis exceeds the cost of storage, and to time storage decisions based on when a producer harvests the crop relative to the national harvest of the crop. Stated somewhat differently, an effective marketing program begins with first learning and practicing effective cash marketing.