Agricultural Marketing ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 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. 11 Offset hedge and sold Apr. 11 So the corn was in storage for 5.3 months

Relevant Prices and Costs Cash Prices: Nov. 1 $3.43 Apr. 11 $3.22 Basis at Sale: -$0.35 Prod. Costs: -$3.72 Futures Prices: Jan. 11 $3.57 Apr. 11 $3.57 Storage Costs: $0.01/month Interest Rate: 7.5%

Costs of Ownership Storage Costs Opportunity Costs 5.3 months * $0.01/bu/month * 25,000 bu $1,325 or $0.053/bu Opportunity Costs (5.3/12) * $3.43/bu * 7.5% * 25,000 bu $2,840.47 or $0.1136/bu Total $4,165.47 or $0.1666/bu

Futures/Options Return Sold 5 May ’16 corn futures on Jan. 11 @ $3.57 Offset by buying 5 May ’16 corn futures on Apr. 11 @ $3.57 Paid broker $0.01/bu for the service Per Bushel Return: ($3.57 - $3.57) - $0.01 = -$0.01 Return on Hedge: -$250.00

Final Tally for On-farm Corn Per Bushel Total Cash Price $3.22 $80,500.00 Production Cost -$3.72 -$93,000.00 -$0.50 -$12,500.00 Costs of Ownership -$0.1666 -$ 4,165.47 -$0.6666 -$16,665.47 Futures/Options Return -$0.01 -$ 250.00 Final Net Return -$0.6766 -$16,915.47

25,000 Bushels of Corn Stored at Coop Timeline Harvested Nov. 1 Sold some & bought put Jan. 11 Sold more Feb. 22 Sold the rest & offset put Apr. 11 Some of the corn was in storage for 2.3 months, some for 3.7 months, and the rest was in storage for 5.3 months

Relevant Prices and Costs Cash Prices: Nov. 1 $3.43 Jan. 11 $3.19 Feb. 22 $3.39 Apr. 11 $3.22 Basis: Jan. 11 -$0.3275 Feb. 22 -$0.285 Apr. 11 -$0.35 Prod. Costs: -$3.72 Storage Costs: $0.03/month Interest Rate: 7.5%

Relevant Prices and Costs Put Option: May 2016 Corn @ $3.50 Futures Prices: Jan. 11 $3.57 Apr. 11 $3.57 Put Premium: Jan. 11 $0.12 Apr. 11 $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) * $3.43/bu * 7.5% * 5,000 bu $246.53 or $0.0493/bu Total $591.53 or $0.1183/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) * $3.43/bu * 7.5% * 15,000 bu $1,189.78 or $0.0793/bu Total $2,854.78 or $0.1903/bu

Costs of Ownership Storage Costs Opportunity Costs 5.3 months * $0.03/bu/month * 5,000 bu $795 or $0.159/bu Opportunity Costs (5.3/12) * $3.43/bu * 7.5% * 5,000 bu $568.09 or $0.1136/bu Total $1,363.09 or $0.2726/bu Grand Total $4,809.40 or $0.1924/bu

Futures/Options Return Bought 1 May ’16 corn put option w/ $3.50 strike price on Jan. 11 @ $0.12 Offset by selling 1 May ’16 corn put option w/ $3.50 strike price on Apr. 11 @ $0.01 Paid broker $0.01/bu for the service Per Bushel Return: ($0.01 - $0.12) - $0.01 = -$0.12 Return on Option: -$600.00

Final Tally for Off-farm Corn Per Bushel Total Cash Price – Sale 1 $3.19 $15,950.00 Cash Price – Sale 2 $3.39 $50,850.00 Cash Price – Sale 3 $3.22 $16,100.00 $3.316 $82,900.00 Production Cost -$3.72 -$93,000.00 -$0.404 -$10,100.00 Costs of Ownership -$0.1924 -$ 4,809.40 -$0.5964 -$14,909.40 Futures/Options Return -$0.024 -$ 600.00 Final Net Return -$0.6204 -$15,509.40

Final Tally for All of My Corn Per Bushel Total Cash Price $3.268 $163,400.00 Production Cost -$3.72 -$186,000.00 -$0.452 -$ 22,600.00 Costs of Ownership -$0.1795 -$ 8,974.87 -$0.6315 -$ 31,574.87 Futures/Options Return -$0.017 -$ 850.00 Final Net Return -$0.6485 -$ 32,424.87

Estimate 2016 Production Costs

Estimate 2016 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/Spring2016/index.htm