ECON 337: Agricultural Marketing

Econ 337, Spring 2013

ECON 337:Agricultural Marketing

Chad HartAssociate [email protected]

Lee SchulzAssistant [email protected]


May May Strike Price 7.30

Date Spot Cash Futures BasisForward

CashForward

BasisPut

PremiumCall

Premium

Corn 1/16/2013 7.26 7.3125 -0.0525 7.30 -0.0125 0.33125 0.34375

1/23/2013 7.16 7.2275 -0.0675 7.22 -0.0075 0.35 0.2775

May May Strike Price 14.20

Date Spot Cash Futures BasisForward

CashForward

BasisPut

PremiumCall

Premium

Soybeans 1/16/2013 14.18 14.2125 -0.0325 13.83 -0.3825 0.56125 0.57375

1/23/2013 14.18 14.2675 -0.0875 13.94 -0.3275 0.52125 0.58875

June Strike Price 128.000

Date Spot Cash Futures BasisPut

PremiumCall

Premium

Live Cattle 1/16/2013 124.130 127.875 -3.745 3.350 3.225

1/23/2013 124.000 126.625 -2.625 3.900 2.525

June Strike Price 96.000

Date Spot Cash Futures BasisPut

PremiumCall

Premium

Lean Hogs 1/16/2013 84.840 96.650 -11.810 3.300 3.9501/23/2013 87.580 96.900 -9.320 3.100 4.000

Old Crop/Livestock Weekly Table


New Crop/Livestock Weekly Table Oct Dec Strike Price 5.90

Date Forward Cash Futures Basis Put Premium Call Premium

Corn 1/16/2013 5.45 5.9225 -0.4725 0.5225 0.545

1/23/2013 5.43 5.9025 -0.4725 0.53 0.5325

Oct Nov Strike Price 13.00

Date Forward Cash Futures Basis Put Premium Call Premium

Soybeans 1/16/2013 12.22 12.97 -0.75 0.90375 0.87375

1/23/2013 12.30 13.045 -0.745 0.8775 0.9225

Feb Strike Price 136.00

Date Futures Put Premium Call Premium

Live Cattle 1/16/2013 135.00 5.225 4.225

1/23/2013 134.00 5.700 3.725

Feb Strike Price 84.00

Date Futures Put Premium Call Premium

Lean Hogs 1/16/2013 84.40 4.275 4.675

1/23/2013 85.00 4.075 5.075


Market ParticipantsSpeculators have no use for the physical

commodityThey buy or sell in an attempt to profit from price

movementsAdd liquidity to the market

May be part of the general public, professional traders or investment managersShort-term – “day traders”Long-term – buy or sell and hold


$2.00

$3.25

$4.50

$5.75

$7.00

$8.25

$9.50

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Total Trade Non Comm Net Price

Corn Futures Trade

Source: CFTC


$5.00

$7.50

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$17.50

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Bill

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ush

els


Soybean Futures Trade

Source: CFTC


$100.00

$105.00

$110.00

$115.00

$120.00

$125.00

$130.00

$135.00

$140.00

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Live Cattle Futures Trade

Source: CFTC


$70.00

$75.00

$80.00

$85.00

$90.00

$95.00

$100.00

$105.00

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Lean Hogs Futures Trade

Source: CFTC


Bullish Speculator

Time

Now

Buy futures contract Sell contract back

MaturityLater

“Open” a “long” futures position

“Close” the “long” position

“Long” futures position

No futures position

No futures position

“Make” a promise “Offset” the promise


-12.00

-9.00

-6.00

-3.00

0.00

3.00

6.00

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12.00

Ne

t R

etu

rn (

$ p

er

cwt.)

Futures Price ($ per cwt.)

Going LongBought April 2013 Lean Hogs @ $88.925 on Jan. 25


Bearish Speculator

Time

Now

Sell futures contract Buy contract back

MaturityLater

“Open” a “short” futures position

“Close” the “short” position

“Short” futures position

No futures position

No futures position

“Make” a promise “Offset” the promise


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-6.00

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0.00

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6.00

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Ne

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rn (

$ p

er

cwt.)


Going ShortSold April 2013 Live Cattle @ $130.75 on Jan. 25


SpeculatorsSpeculators:

Buy or sell in an attempt to profit from favorable price movements

Face the risk of losses from unfavorable price movements

Do not produce or consume the commodity

Benefit the market because they add liquidity

Often trade the news of the day


Why Speculators Like Futures Markets

Relatively little capital requiredInitial margin, margin calls

No need to handle commodity (e.g., transportation, storage, cleaning)

Easy to speculate on either side of the market (Up or Down)


How Would You Speculate? Drought conditions are projected for the Corn Belt

Reports of a bumper crop in Brazilian soybeans

Rumors of foot and mouth disease in the U.S.

Inflation is projected to rise


Day TradersLooking for quick within-day price moves

Might be “long” today and “short” tomorrow

Limit the risk they face by limiting their amount of time in the market


-12.00

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-6.00

-3.00

0.00

3.00

6.00

9.00

12.00

Ne

t R

etu

rn (

$ p

er

cwt.)


Going ShortSold April 2013 Live Cattle @ $130.75 on Jan. 25


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Ne

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rice

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pe

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t.)


Cash Price Futures Return Net

Short Hedge


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t R

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$ p

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cwt.)


Going LongBought April 2013 Lean Hogs @ $88.925 on Jan. 25


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rice

($

pe

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Cash Price Futures Return Net

Long Hedge


Cash Contracts When we talk about a cash contract, it is an

agreement between a seller and a buyer covering a quantity and quality of a product to be delivered at a specified location and time for a specific price

If the time is now, we call it a “cash” contract

If the time is sometime in the future, then it’s a “forward cash” contract


Cash BidsKey Coop, Gilbert http://dtn.keycoop.com/index.cfm?show=11&mid=3&locationID=7

Key Coop, Lincolnway Energy http://dtn.keycoop.com/index.cfm?show=11&mid=3&commodity=LWE

Heartland Coop https://myaccount.heartlandcoop.com/bids.htm

Cargill http://www.cargillag.com/marketing/localbidscenter.aspx

West Central Coop http://www.west-central.com/grain/west-central-bids/default.aspx


The Highest Cash Price Is …… Not always the highest return

Need to think about transportation and storage costs

Compare the cash prices we’ve seen today: If storage is costing me 3 cents/bushel/month, do the

May bids look better than the current cash price?

If transportation is costing me 0.5 cents/bushel/mile, which is the better price?

Boone (16 miles) Gilbert (8 miles) Nevada (10 miles) Alleman (16 miles) Eddyville (100 miles)


Cash vs. Futures HedgeCash Sales

Locks in full price and delivery terms No margin requirements

Futures Hedge Locks in futures price, but leaves basis open

Could see price improvement/loss Can be easily offset if problems arise


Class web site:http://www.econ.iastate.edu/~chart/Classes/

econ337/Spring2013/

Have a great weekend!

Documents

ECON 337: Agricultural Marketing