Econ 337, Spring 2012 ECON 337: Agricultural Marketing Chad Hart Assistant Professor

Econ 337, Spring 2012 Corn Weekly Tracking Table DateSpot Cash Price May ’12 Futures Price BasisForward Cash Price Forward Cash Basis Option Premiums with $6.60 Strike PutCall Jan Jan

Econ 337, Spring 2012 Soybean Weekly Tracking Table DateSpot Cash Price May ’12 Futures Price BasisForward Cash Price Forward Cash Basis Option Premiums with $12.40 Strike PutCall Jan Jan

Econ 337, Spring 2012 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

Econ 337, Spring 2012 Corn Futures Trade Source: CFTC

Econ 337, Spring 2012 Soybean Futures Trade Source: CFTC

Econ 337, Spring 2012 Bullish Speculator Time Now Buy futures contractSell contract back MaturityLater “Open” a “long” futures position “Close” the “long” position “Long” futures position No futures position “Make” a promise“Offset” the promise

Econ 337, Spring 2012 Going Long Bought Dec $5.84 on Jan. 9

Econ 337, Spring 2012 Bearish Speculator Time Now Sell futures contractBuy contract back MaturityLater “Open” a “short” futures position “Close” the “short” position “Short” futures position No futures position “Make” a promise“Offset” the promise

Econ 337, Spring 2012 Going Short Sold Nov $12.22 on Jan. 9

Econ 337, Spring 2012 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

Econ 337, Spring 2012 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)

Econ 337, Spring 2012 How Would You Speculate?  Drought conditions are projected for the Corn Belt  Reports of a bumper crop in Brazilian soybeans  China is rumored to be in the market for corn  Inflation is projected to rise

Econ 337, Spring 2012 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

Econ 337, Spring 2012 Going Short

Econ 337, Spring 2012 Short Hedge

Econ 337, Spring 2012 Going Long

Econ 337, Spring 2012 Long Hedge

Econ 337, Spring 2012 Cash Contracts  When we talk about a cash contract, it is an agreement between a seller and a buyer covering a quantity and quality of a product to be delivered at a specified location and time for a specific price  If the time is now, we call it a “cash” contract  If the time is sometime in the future, then it’s a “forward cash” contract

Econ 337, Spring 2012 Cash Bids Key Coop, Gilbert Key Coop, Lincolnway Energy Heartland Coop Cargill West Central Coop

Econ 337, Spring 2012 The Highest Cash Price Is … … Not always the highest return Need to think about transportation and storage costs Compare the cash prices we’ve seen today:  If storage is costing me 3 cents/bushel/month, do the May bids look better than the current cash price?  If transportation is costing me 0.5 cents/bushel/mile, which is the better price? Boone (16 miles) Gilbert (8 miles) Nevada (10 miles) Alleman (16 miles) Eddyville (100 miles)

Econ 337, Spring 2012 Cash vs. Futures Hedge  Cash Sales  Locks in full price and delivery terms  No margin requirements  Futures Hedge  Locks in futures price, but leaves basis open  Could see price improvement  Can be easily offset if problems arise

Econ 337, Spring 2012 Class web site: Spring2012/ Have a great weekend!