Agricultural Marketing ECON 337: Agricultural Marketing Chad Hart Associate Professor chart@iastate.edu 515-294-9911 1

Example Transaction for Marketing Report Details Cash Price Basis Gross Revenue Net Return after Prod. Costs Futures/Options Return Storage and Opportunity Costs Final Net Return

25,000 Bushels of Corn Stored at Home Timeline Harvested Nov. 1 Hedged with futures Jan. 10 Offset hedge and sold Mar. 31 So the corn was in storage for 5 months

Relevant Prices and Costs Cash Prices: Nov. 1 $3.05 Mar. 31 $3.24 Basis at Sale: -$0.42 Prod. Costs: -$3.23 Futures Prices: Jan. 10 $3.65 Mar. 31 $3.64 Storage Costs: $0.01/month Interest Rate: 5%

Costs of Ownership Storage Costs Opportunity Costs 5 months * $0.01/bu/month * 25,000 bu $1,250 or $0.05/bu Opportunity Costs (5/12) * $3.05/bu * 5% * 25,000 bu $1,588.54 or $0.0635/bu Total $2,838.54 or $0.1135/bu

Futures/Options Return Sold 5 May ’17 corn futures on Jan. 1 @ $3.65 Offset by buying 5 May ’17 corn futures on Mar. 31 @ $3.64 Paid broker $0.01/bu for the service Per Bushel Return: ($3.65 - $3.64) - $0.01 = $0.00 Return on Hedge: $0.00

Final Tally for On-farm Corn Per Bushel Total Cash Price $3.24 $81,000.00 Production Cost -$3.23 -$80,750.00 $0.01 $ 250.00 Costs of Ownership -$0.1135 -$ 2,838.54 -$0.1035 -$ 2,588.54 Futures/Options Return $0.00 $ 0.00 Final Net Return

25,000 Bushels of Corn Stored at Coop Timeline Harvested Nov. 1 Sold some & bought put Jan. 10 Sold more Feb. 22 Sold the rest & offset put Mar. 31 Some of the corn was in storage for 2.3 months, some for 3.7 months, and the rest was in storage for 5 months

Relevant Prices and Costs Cash Prices: Nov. 1 $3.05 Jan. 10 $3.16 Feb. 22 $3.23 Mar. 31 $3.24 Basis: Jan. 10 -$0.49 Feb. 22 -$0.55 Mar. 31 -$0.42 Prod. Costs: -$3.23 Storage Costs: $0.03/month Interest Rate: 5%

Relevant Prices and Costs Put Option: May 2017 Corn @ $3.50 Futures Prices: Jan. 10 $3.65 Mar. 31 $3.64 Put Premium: Jan. 10 $0.08 Mar. 31 $0.01

Costs of Ownership Storage Costs Opportunity Costs 2.3 months * $0.03/bu/month * 5,000 bu $345 or $0.069/bu Opportunity Costs (2.3/12) * $3.05/bu * 5% * 5,000 bu $146.15 or $0.0292/bu Total $491.15 or $0.0982/bu

Costs of Ownership Storage Costs Opportunity Costs 3.7 months * $0.03/bu/month * 15,000 bu $1,665.00 or $0.111/bu Opportunity Costs (3.7/12) * $3.05/bu * 5% * 15,000 bu $705.31 or $0.0470/bu Total $2,370.31 or $0.1580/bu

Costs of Ownership Storage Costs Opportunity Costs 5 months * $0.03/bu/month * 5,000 bu $750 or $0.15/bu Opportunity Costs (5/12) * $3.05/bu * 5% * 5,000 bu $317.71 or $0.0635/bu Total $1,067.71 or $0.2135/bu Grand Total $3,929.17 or $0.1572/bu

Futures/Options Return Bought 1 May ’17 corn put option w/ $3.50 strike price on Jan. 10 @ $0.08 Offset by selling 1 May ’17 corn put option w/ $3.50 strike price on Mar. 31 @ $0.01 Paid broker $0.01/bu for the service Per Bushel Return: ($0.01 - $0.08) - $0.01 = -$0.08 Return on Option: -$400.00

Final Tally for Off-farm Corn Per Bushel Total Cash Price – Sale 1 $3.16 $15,800.00 Cash Price – Sale 2 $3.23 $48,450.00 Cash Price – Sale 3 $3.24 $16,200.00 $3.218 $80,450.00 Production Cost -$3.23 -$80,750.00 -$0.012 -$ 300.00 Costs of Ownership -$0.1572 -$ 3,929.17 -$0.1692 -$ 4,229.17 Futures/Options Return -$0.016 -$ 400.00 Final Net Return -$0.1852 -$ 4,629.17

Final Tally for All of My Corn Per Bushel Total Cash Price $3.229 $161,450.00 Production Cost -$3.23 -$161,500.00 -$0.001 -$ 50.00 Costs of Ownership -$0.1354 -$ 6,767.71 -$0.1364 -$ 6,817.71 Futures/Options Return -$0.008 -$ 400.00 Final Net Return -$0.1444 -$ 7,217.71

Estimate 2017 Production Costs

Estimate 2017 Production Costs

Other Information/Decisions Expected Production Futures Hedges Options Forward Sales Crop Storage Crop Insurance Farm Bill Programs

Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2017/index.htm