Class Intro and Introduction to Futures ECON 337: Agricultural Marketing Class Intro and Introduction to Futures 1

Lee Schulz Associate Professor lschulz@iastate.edu 515-294-3356 Heady 478D Chad Hart Associate Professor chart@iastate.edu 515-294-9911 Heady 478F 2 2

Class Time: Tue/Thu 9:30-10:50am Heady 68 Office Hours: By appointment TA: Jiwon Lee Class website: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2019/index.htm 3 3

Guidelines and rules: No cell phone calls or texting in class Class attendance is highly recommended Course reading and resource materials will be available on class website Grading: Two exams 40% Homework assignments and quizzes 30% Marketing plan project and report 30% 4 4

Course objectives: Understand the use of futures, options, and other tools in marketing and risk management decisions Understand the use of cash sales and contracts and the role of basis, storage, and transportation in determining prices Know the various sources of agricultural data information and the roles these data play within the commodity markets Understand the forces that shape commodity markets and learn about market/price forecasting Design an integrated production and marketing plan for farms and agribusinesses 5 5

Marketing A series of events and services to create, modify, and transport a product from initial creation to consumption Possible steps: Planning Production Inspection Transport Storage Processing Sale Market players: Producers Elevators Processors Transport companies Banks/Insurance companies Traders Feeders 6 6

Market Functions Location Where do you want it? Time Form Price discovery Where do you want it? When do you want it? How do you want it? What will you pay for it? 7 7

Cash Markets A market where physical commodities are traded Local elevators Ethanol plants & soybean crushers River terminals Feeders/feed mills Auctions Packing plants 8 8

Futures Markets A market where contracts for physical commodities are traded, the contracts set the terms of quantity, quality, and delivery Chicago: Corn, soybeans, cattle, hogs Along with wheat (soft red), oats, rice Kansas City: Wheat (hard red winter) Minneapolis: Wheat (hard red spring) Tokyo: Corn, soybeans, coffee, sugar Has a market for Non-GMO soybeans Other markets in Argentina, Brazil, China, and Europe 9 9

The Cash and Futures Markets Are Related Basis = Cash price – Futures price Rearranging terms: Cash price = Futures price + Basis So national (and international) events can affect local prices

Market Activities Pricing the commodity Establishing contracts Merchandising the commodity among uses Transporting the products Storing the products Managing and controlling the products Managing production and price risks 11 11

Price Determination and Discovery is the broad forces of supply and demand establishing a market clearing price for a commodity. Price Discovery is the process by which buyers and sellers arrive at a specific price for a given lot of produce at a given location for a specific time period.

Price Determination and Price Discovery Pe D Q Qe

Futures Markets Organized and centralized market Today’s price for products to be delivered in the future A mechanism of trading promises of future commodity deliveries among traders

Futures and Options Market tools to help manage (share) price risks Mechanisms to establish commodity trades among participants at a future time Available from commodity exchanges / futures markets

Agricultural Futures Markets Has some unique features due to the nature of agricultural businesses Supply comes online a few times during the year So at harvest, supply spikes, then diminishes until the next harvest Production decisions are based price forecasts Planting decisions can be made a full year (or more) before the crop price is realized Users provide year-round demand Livestock feeding, biofuel production, food demand 16 16

Futures Market Exchanges Competitive markets Open out-cry and electronic trading Centralized pricing Buyers and sellers are both in the market Relevant information is conveyed through the bids and offers for the trades Bid = the price at which a trader would buy the commodity Offer = the price at which a trader would sell the commodity 17 17

Futures Market Exchanges Modern futures market began long ago 1848 -- Chicago Board of Trade 1898 -- Chicago Mercantile Exchange 2007 -- CME Group merged CBOT and CME Highly regulated markets Commodity Futures Trading Commission (CFTC)

The View from the Corn Pit Source: M. Spencer Green, AP Photo 19 19

Futures trading done live, in the pit, on the trading floors of the CME, NYMEX & CBOT is almost completely over Modern futures traders are trading almost 100% electronic

Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2019/index.htm