ECON 337: Agricultural Marketing Chad Hart Associate Professor Lee Schulz Assistant Professor

Soybean Futures  Form  5,000 bushels  No. 2 Yellow Soybeans (at price), No. 1 Yellow soybeans (at 6 cents over price), and No. 3 Yellow Soybeans (at 6 cents under price)  Time  Contract months: Sept, Nov, Jan, Mar, May, July, and August Source: CME Group

Soybean Futures Partial listing of delivery points Source: CME Group Rulebook

Delivery Points Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report CornSoybeans Wheat

Futures Contracts  No physical exchange takes place when the contract is traded (no actual commodity moves)  Payment is based on the price established when the contract was initially traded (prices can and will change before delivery is taken)  Deliveries can be made when the contract expires or the offsetting futures position must be taken to settle up  Deliveries occur on less than 5 percent of the traded contracts

Market Positions  You can either buy or sell initially to open a position in the futures market  “Make” a promise to make or take delivery  Do the opposite to close the position at a later date  “Offset” the promise (and no commodity changes hands)  Trader may also hold the position until expiration and make or take physical delivery of the commodity

Trading Futures Contracts  All trades through a licensed broker  Brokerage house has a “seat” at the exchange and is allowed to trade  Represented “on the floor” to exercise trade  Local broker to initiate transaction and manage account with client  Full service and discount brokers

CME Group   Open, High, Low, Last Price  Settlement Price  Volume  Open Interest  Daily Limits

Terms and Definitions  Basis  The difference between the spot or cash price and the futures price of the same or a related commodity.  Bear  Someone that thinks the price will decline  Bull  Someone that thinks the price will increase

Cash vs. Futures Prices Iowa Corn in 2013 The gap between the lines is the basis.

2013 Basis for Iowa Corn

Terms and Definitions  Clearing House  The division of the futures exchange through which all trades made must be confirmed, matched and settled each day until offset or delivered.  Commission  For futures contracts, the one-time fee charged by a broker to cover the trades you make to open and close each position.

Terms and Definitions  Long position  A position in which the trader has bought a futures contract that does not offset a previously established short position.  Short position  A position in which the trader has sold a futures contract that does not offset a previously established long position.

Going Short Sold Dec $4.55 What type of trader (bull or bear) would go short? What events would send prices in a favorable direction?

Going Long Bought Nov $11.20 What type of trader (bull or bear) would go long? What events would send prices in a favorable direction?

Margin Accounts A margin account is an account that traders maintain in the market to ensure contract performance. There are minimum limits on the size of the account. CropTrader TypeInitialMaintenance CornHedger/Speculator$2,363$1,750 SoybeansHedger/Speculator$3,915$2,900 Lean HogsHedger/Speculator$1,350$1,000 Live CattleHedger/Speculator$1,013$ 750 To trade, you must create a margin account with at least the “Initial” amount and maintain at least the “Maintenance” amount in the account at the end of each trading day.

Margin Calls  Margin accounts are rebalanced each day  Depending on the value of futures  Settlement price  If your futures are losing value, money is taken out of the margin account to cover the loss  If the account value falls below the “Maintenance” level, you receive a margin call (a call to put additional money in your margin account) and the balance is brought back up to the Initial amount

Margin Example  Let’s say I went short on Mar corn  $4.345/bushel on Jan. 13  Along with selling a corn futures contract, I have to establish a margin account and deposit $2,363 in it  On Jan. 17, the Mar corn futures price moved to $4.24/bushel  Since I’ll be buying the futures contract later, this price move is in my favor

Margin Example  I gained 10.5 cents per bushel and since the contract is for 5,000 bushels, that’s a gain of $525  At the end of the day (Jan. 17), $525 is deposited into my margin account, raising the account balance to $2,888  Since $2,888 is greater than the “Maintenance” level, I will not receive a margin call

Margin Example #2  Let’s say, instead of going short, I went long on May 2014 corn  $4.4775/bushel on Dec. 11  Along with buying a corn futures contract, I have to establish a margin account and deposit $2,363 in it  On Jan. 17, the May 2014 corn futures price moved to $4.3175/bushel  Since I’ll be selling back the futures contract later, this price move is not in my favor

Margin Example #2  I lost 16 cents per bushel and since the contract is for 5,000 bushels, that’s a loss of $800  At the end of the day (Jan. 17), $800 is to be taken from my margin account, lowering the account balance to $1,563  Since $1,563 is less than the “Maintenance” level, I will receive a margin call and be asked to deposit $800 more into the account or to close out the futures position  The $800 brings the account balance back up to the initial requirement

DatePriceGainMargin Call Account Balance 1/10/14$4.4075$2,363 1/13/14$4.425-$87.50$2, /14/14$4.395+$150$2, /15/14$4.335+$300$2, /16/14$4.355-$100$2, /17/14$ $187.50$2,813 Margin Example – Going Short

DatePriceGainMargin Call Account Balance 1/10/14$4.4075$2,363 1/13/14$4.425+$87.50$2, /14/14$4.395-$150$2, /15/14$4.335-$300$2, /16/14$4.355+$100$2, /17/14$ $187.50$1,913 Margin Example – Going Long

Class web site: Spring2014/ See you at lab, Heady 68!