Agricultural Marketing ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 1

Market Participants Speculators have no use for the physical commodity They buy or sell in an attempt to profit from price movements Add liquidity to the market May be part of the general public, professional traders or investment managers Short-term – “day traders” Long-term – buy or sell and hold

Corn Futures Trade Source: CFTC 3 3

Soybean Futures Trade Source: CFTC 4 4

Live Cattle Futures Trade Source: CFTC 5 5

Lean Hogs Futures Trade Source: CFTC 6 6

Bullish Speculator Time Now Later Maturity No futures position “Long” futures position No futures position Time Now Later Maturity Buy futures contract Sell contract back “Open” a “long” futures position “Close” the “long” position “Make” a promise “Offset” the promise

Going Long Bought Dec. 2018 Corn @ $3.8500

Bearish Speculator Time Now Later Maturity No futures position “Short” futures position No futures position Time Now Later Maturity Sell futures contract Buy contract back “Open” a “short” futures position “Close” the “short” position “Make” a promise “Offset” the promise

Going Short Sold Dec. 2018 Corn @ $3.8500

Speculators Speculators: 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 required Initial 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? Flooding is projected for Iowa Reports of a bumper crop in Brazilian soybeans Rumors of foot and mouth disease in the U.S. Inflation is projected to rise

Day Traders Looking 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

Going Short Sold Dec. 2018 Corn @ $3.8500

Short Hedge Hedging Dec. 2018 Corn @ $3.8500

Going Long Bought Dec. 2018 Corn @ $3.8500

Long Hedge Hedging Dec. 2018 Corn @ $3.8500

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 Bids Key Coop http://www.keycoop.com/cash-bids Heartland Coop https://myaccount.heartlandcoop.com/bids.htm Cargill https://www.cargillag.com/LocalBids/FindALocation 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 Hedge Cash Sales Futures Hedge 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: Have a great weekend! http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2018/index.htm Have a great weekend!