Commodity Marketing (futures) Mathematical Applications in Agriculture.

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Presentation transcript:

Commodity Marketing (futures) Mathematical Applications in Agriculture

Agribusiness Producers Early Agriculturalists sold commodities at market price at the time of selling. – Today, production agriculturalists use current production, capital, and labor strategies to make prices. – Forward Contracts- A cash contract in which a seller agrees to a price for a specific commodity sometime in the future. – Commodity- A transportable resource product with commercial value.

Commodity Markets Originated in Chicago in the 1800s to help producers reduce price risk. – Standards developed Beef Grading Standards – Commercial – Select – Choice – Avg. Choice – High Choice – Prime – Bushels per acre/ 56 lbs.

Commodity Markets Establishment of the Chicago Board of Trade. Created a centralized marketplace to exchange commodities between buyers and sellers CBOT created futures contracts. Futures Contracts- To buy or sell a commodity in the future. A futures contract specifies quantity, quality, time and price.

Margining Systems To prevent problems of not fulfilling contracts, margining systems were initiated. Margining systems required the seller to deposit funds to guarantee the product they were selling.

Exchanges do not trade physically Prices are negotiated not actually physical product being traded. – Contract specifies certain month that product will be delivered.

What does a contract look like? Contract Specifications Name of Commodity: Corn Where is it traded: Chicago Board of Trade Contract Months: March, April, May, June, July Contract Size: 5,000 bu. Price per bushel in 14 bushel increments.

Determining Value of Futures Contract To figure value of commodity: value = settlement price x contract size Minimum price fluctuations- The smallest price at which a futures contract trades.

Determining Profit on Futures Contract Example: Jul. 1 BUY Dec. Corn futures at $2.50/bu. Jul. 30 SELL Dec. Corn futures at $2.55/bu. _______________________________________ Profit $0.5/bu.

Hedgers and Speculators Headgers- Own or will own actual cash commodity. Speculators- Buy and sell futures contracts and hope to make profit by predicting market movements.