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

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

Soybean Futures Trade Source: CFTC

Live Cattle Futures Trade Source: CFTC

Lean Hogs Futures Trade Source: CFTC

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

Bought Dec $4.15 Going Long

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

Sold Nov $9.76 Going Short

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?  Flooding is projected for Iowa  Reports of a bumper crop in Brazilian soybeans  Rumors of foot and mouth disease in the U.S.  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

Sold Nov $9.76 Going Short

Short Hedge Hedging Nov $9.76

Bought Dec $4.15 Going Long

Long Hedge Hedging Dec $4.15

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

Cash Bids Key Coop Heartland Coop Cargill West Central Coop

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)

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/loss  Can be easily offset if problems arise

Class web site: Spring2015/ Have a great Super Bowl weekend!