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AGEC 420

• Markets

• Hedged storage examples

• Assignment #4 – HedgeSim

• TradeSim – Wednesday?

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Open Position - MidAm Wheat

• Fri., Feb 15: Bot 1 MidAm May Wheat @ 2.82; Sell stop @ 2.74½

Close $ +/-Fri., Feb 15 2.81 ¾ -$2.50

Fri., Feb 22 2.86 ¼ +$42.50

Fri., Mar 1 2.78 ½ -$35.00

Today ???

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Hedged Storage

• Decision rule– Store only if and as long as projected basis

improvement > storage cost

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Example:

Wheat: Aug 1, 1998 Cash price, Salina, $2.60,

March futures, $3.15

– Opening basis: -$0.55– Expected March basis: -$0.18– Projected improvement: $0.37

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Example (cont.):

Cost of carry: (Elevator storage)

– Storage costs per month $0.03

– Interest costs per month $0.02

• (8% x $2.60 x 1/12)

– Total cost per month $0.05

Cost for 7 months $0.35

Decision: Cost < expected basis improvement

Expect 2c/bu margin from hedged storage.

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Example (cont.)

Wheat: March 1, 1999Cash bid from elevator, $2.48

March futures, $2.61

Closing basis is -$0.13

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Calculate Profit

Basis strengthened by $0.42 (from -$0.55 to -$0.13)

Cost of storagewas $0.35

Profit = $0.07c/bu

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Calculate Profit

Cashbuy in Aug @ 2.60; sell in March @ 2.48loss of 12c/bu

Futuressell in Aug @ 3.15 ; buy in March @ 2.61profit of 54c/bu

Cash/Futures profit of 42c/buLess storage cost of 35c/bu

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Notes

• Store only if and as long as projected basis improvement > storage cost

• Hedged storage depicts a situation where one is said to be “long-the-basis” – typical situation for an elevator

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Grain Marketing Workshop

• White Commercial– Thursday April 4, 5pm-9pm, – Waters Hall 328

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St. Francis Basis

St.Francis, Wheat Basis, March 00 KC

-130

-100-70

-40

-1020

50

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7-D

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Expected St. Francis Basis in Mid-March

Cash KC FuturesBasis

• 1996 4.86 5.20 -34

• 1997 4.08 4.30 -22

• 1998 3.17 3.46 -29

• 1999 2.57 2.97 -40

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Decision rule

• Store only if and as long as projected basis improvement > storage cost

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Example – St. Francis

Wheat: Aug 1, 1999 Cash price, St.Francis, $2.25,

March futures, $3.25

– Opening basis: -$1.00– Expected March 1 basis: -$0.50 ??– Projected improvement: $0.50 ??

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Example (cont.):

Cost of carry:

– Storage costs per month $0.04

– interest costs per month $0.02

• (10% x $2.25 x 1/12)

– Total cost per month $0.06

Cost for 7 months $0.42

Decision: Store and hedge by selling March futures

Expected profit: $0.50 - $0.42 = 8c/bu

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Example (cont.)

December 1, 1999Cash price, St. Francis, $2.10

March futures, $2.70

Basis is -$0.60

Continue with hedged storage ??

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Re-evaluate on December 1

Basis -0.60

Exp. Basis, March 1 -0.50

Expected basis strengthening between Dec. 1 and March 1 is 10 cents.

Cost of storage: Dec 1 to March 1 (3 mo @ 6c/mo = 18 cents)

Decision?

Sell grain now and lift hedge.

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Calculate Profit

CashBuy (own) on Aug 1 @ 2.25;

Sell on Dec 1 @ 2.10 Loss of 15c/bu on cash

FuturesSell on Aug 1 @ 3.25;

Buy on Dec 1 @ 2.70 Profit of 55c/bu on futures

Storage cost 4 mo @ 6c/mo = 24c

Profit: $0.55 - $0.15 - $0.24 = 16c/bu

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Storage hedge

Profit = basis improvement – storage cost

Store only if and as long as projected basis improvement > storage cost