Agricultural Marketing ECON 339X: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911 John Lawrence Professor jdlaw@iastate.edu 515-294-7801 1

Going Short Sold Nov. 2011 Soybeans @ $12.73, 1/11/11 Futures @ $13.36 63 cent shift Cash quote for Oct. soybeans from Alleman 1/11/11 $11.92 1/19/11 $12.55 63 cent shift

Short Hedge Expected Price Futures prices when I place the hedge + Expected basis at delivery – Broker commission In my example: ($ per bushel) Nov. 2011 soybean futures 12.73 Historical basis for Nov. -0.25 Commission on trade -0.01 Expected local hedged price 12.47

Short Hedge Margin Example Date Price Gain Margin Call Account Balance 1/11/11 $12.73 $3,250 1/12/11 $13.08 -$1,750 $1,750 1/13/11 $13.12 -$200 $200 1/14/11 $13.23 -$550 $550 1/18/11 $13.26 -$150 $150 1/19/11 $13.36 -$500 $500 Overall $3,150

Going Long Bought Dec. 2011 Corn @ $5.48, 1/11/11 Futures @ $5.68 20 cent shift Cash quote for Nov. corn from Alleman 1/11/11 $4.91 1/19/11 $5.10 19 cent shift

Long Hedge Example Expected price = Futures prices when I place the hedge + Expected basis at delivery + Broker commission In my example: ($ per bushel) Dec. 2011 corn futures 5.48 Historical basis for Dec. -0.25 Commission on trade +0.01 Expected local net price 5.24

Long Hedge Margin Example Date Price Gain Margin Call Account Balance 1/11/11 $5.48 $1,500 1/12/11 $5.60 +$600 $2,100 1/13/11 $5.70 +$500 $2,600 1/14/11 $5.71 +$50 $2,650 1/18/11 $5.78 +$350 $3,000 1/19/11 $5.68 -$500 $2,500 Overall $0

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 Another factor is a recent return of the funds in the market. Source: CFTC 9 9

Soybean Futures Trade Source: CFTC Another factor is a recent return of the funds in the market. Source: CFTC 10 10

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. 2011 Corn @ $5.48, 1/11/11

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 Nov. 2011 Soybeans @ $12.73, 1/11/11

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? Sudden death syndrome in soybeans returns to Iowa for the 2nd year in a row Reports of a bumper crop in Argentine corn China rumored to be in the market for corn 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

Class web site: http://www.econ.iastate.edu/~chart/Classes/econ339/Spring2011/