Chicago Mercantile Exchange information sources information/index.html

2008

Next wk. normal * 4/28/08

Gaps: $5.20, $5.405, $5.598 Major risk: cutting tax credit For ethanol Max. Upside Potential: variable cost of ethanol production, tax credits, And gasoline-ethanol prices Dec. 08 Corn

Nov. 08 Soybeans Down-side Risk: $10.54

Cash Flow Risk Ratio for Corn 50/50 Crop 1/3-2/3 Owners Renter Share Buyer Cash flow cost per acre$458 $720 $318 $714 Govt. payments?-$9 -$4.50 -$9 Cash needed from sales$449 $711 $313.5 $705 Expected or actual yield (bu.) Cash flow breakeven price$2.43 $3.84 $3.39 $3.81 Hedged market price ($/bu)$5.72 Cash flow risk ratio42% 67% 59% 67% Cash flow R. R., $4.70 price? 52% 82% 72% 81% $4.70 price, Owners need to sell 52% of crop to cover cash-flow needs. Partly from Dr. William Edwards, ISU Economics Department April 08

Table 5. Example Net Worth Risk Ratios For Corn in Central Iowa April 08 Owners Renters Crop-shareBuyers 000 $ assets $3,350 $357.3 $ , $ liabilities $0 $185.3 $84.6 $ Net worth $3,350 $ ,125.7 Net worth risked (10%) 335,000 17,200 16, ,570 Crop acres Net worth risk ratio $558 $28.67 $27.6 $187.6 Max.Loss/bu.,norm. yld. $3.02 $0.155 $0.298 $1.01 Interpretation: A loss of $0.16/bu. (from cash-flow break-even price would reduce renter’s net worth by 10%. Price for max. loss -$0.59 $3.68 $3.09 $2.80

Cash Flow Break-even & Risk Ratio for Soybeans 50/50 Crop 1/3-2/3 Owners Renter Share Buyer Cash flow cost per acre $255 $503 $160.5 $523 Govt. payments?-$12 -$6 -$12 Cash needed from sales$243 $491 $154.5 $511 Expected or actual yield (bu.)/ A Cash flow breakeven price$4.86 $9.82 $6.18 $10.22 Hedged market price ($/bu) $11.09 Cash flow risk ratio44% 89% 56% 92% $11.09 price, Owners need to sell 44% of crop to cover cash-flow needs. Partly from Dr. William Edwards, ISU Economics Department April 08 Risk Ratio at $9.60/bu. price 51% 102% 64% 106%

Univ. of Illinois does an annual evaluation of Ag Market Advisory Services. You can get the report at the above web address. Assignment: Working individually or in teams of 2-4 people, answer these questions: 1.For the advisory services as a group, how much better in average cents per bushel are they than the average price received by farmers? __________corn _____________ soybeans 2.For the services as a group, how does their average price compare with the 20-month market benchmark? Corn _____ Soybeans _______________. 3. For the services as a group, how does their average price compare with the 24-month market benchmark? _________ Corn, _______________ Soybeans. Assignment II: Advisory Service Performance

Univ. of Illinois annual evaluation of Ag Market Advisory Services, assignment, cont. Questions: 1.Has any one advisory service been able to beat the 24 month market benchmark every year over the study period? On Corn? ___ _________________. On Soybeans? ____________________. 2.How much does the ranking of individual advisory services vary from year to year? ____________________________. 3.Brock is an advisory service used by Cargill in some of its Contracts. On average, how has Brock ranked among advisory Services? On corn?________ On soybeans?________ Pro Farmer is headquartered in Cedar Falls, Iowa. How has it Ranked among advisory services? On corn?________Soybeans?___ _________________________.

Storage Economics Costs to store on & off farm Seasonality of prices Harvest basis & carrying charge Timing and amount of cash-flow needs

Post Harvest Seasonal Price Trends Fact: Since 1990, the May cash corn price has exceeded October in 14 of 17 years (82%).

Fact: Since 1990, the May cash soybean price has exceeded October in 12 of 17 years (71%). Post Harvest Seasonal Price Trends

July $3.34 May $3.32 March $3.27 Dec. $3.17 CBOT Corn Futures: October 16, 2006 What determines price differences between delivery months (e.g. December vs. March corn)? Is it expectations? These price differences reflect market determined storage costs (aka carrying charges). Large carrying charges, where deferred contracts trade at a premium to nearby contracts, are common when free supplies are large. Carrying Charges and Selling the Carry

Nov. $7.29 Mar $7.10 May $6.65 Jul $6.50 Aug. $6.27 Carrying Charges and Selling the Carry Store grain today and… sell tomorrow?!?

Decision Tree for Sizing Up the Market

Price as of 04/18/08 11:15AM CDT. Refresh for current price. Price as of 04/18/08 11:15AM CDT. Refresh for current price. CORN CORN LDP Info: PCP: $ 5.58 LDP: $-3.73 Date: 4/18 Jewell 4/24/08 April 08 May June July August FH Sep LH Sep October November December January 09 February March April 09 Store or sell now? Market Signals?

Year Dec 10/15 July 10/15 Dec/Jul Carry Ave What is the carry? CBOT Corn Futures Carrying Charges at Harvest

SOYBEANS +/-RolandNevadaBurgZearingStoryGilbertKelley ADMIF Apr May Jun Jul Oct Jan /23/08 Heart of Iowa Cooperative

Year Nov 10/15 July 10/15 Nov/Jul Carry (0.06) (0.64) Ave What is the carry? CBOT Soybean Futures Carrying Charges at Harvest

Contract15-Oct15-MayChange (0.23) (0.21) (0.53) (0.05) (0.16) (0.21) (0.19) (0.61) Average (0.03) Eight of ten years (80%) the July declined, an average of 3 cents per bushel for all years. Years after 1980 when July corn was greater than $2.90 at harvest. Are Market Prices High? CBOT July Corn Futures

Sizing Up the Market Cumulative Variable On-farm Storage Costs ($/bushel) Assumes… 8% interest rate $3.00/bu cash corn $4.00/bu cash wheat $7.00/bu cash soybeans In/out costs* of… 8 cents/bu corn 11 cents/bu soybeans 8 cents/bu wheat * Based on estimates of NDSU Extension Service MonthsCorn Soybean sWheat 1$0.10$0.16$0.11 2$0.12$0.20$0.13 3$0.14$0.25$ $0.30$0.19 5$0.18$0.34$0.21 6$0.20$0.39$0.24 7$0.22$0.44$0.27 8$0.24$0.48$0.29 9$0.26$0.53$ $0.28$0.58$ $0.30$0.62$ $0.32$0.67$0.40

On-farm Corn Storage Costs 7 months $5.78/Bu.) Extra shrink to 13% $0.145 Extra drying to 13% % Handling 0.02 Quality deterioration (1%) Total $6.40 May call = $0.90/bu.

On-farm Corn Storage Costs 3 months $5.78/Bu.) Extra shrink to 13% $0.00 Extra drying to 13% % Handling 0.02 Quality deterioration (1%) 0.00 Total $6.40 May call = $0.90/bu. Jewell Price premium, harvest to January = $0.11

Off-farm Corn Storage Costs 8 months Extra shrink to 14% $0.08 Extra drying to 14% % 0.27 Handling 0.00 Storage Total Price-later 0.495

On-farm Soybean Storage Costs: 3 $11.36/Bu. 7% $0.20 Handling 0.02 Quality deterioration (1%) 0.00 Total 0.22 HOI Jan. 09 bid vs. Oct

Theoretical Seasonal pattern for C. Iowa July basis Transportation cost to Chicago Storage costs to July delivery $ Under July futures Oct. Dec. Feb. April June July

Implications of Emerging Energy Market A lot more corn acres will be needed ‘ Corn prices: volatile & weather-sensitive Basis opportunities will be greater More storage, handling capacity needed Spring 2008: look for periods of higher corn prices, strong corn basis Cautions about selling 2009 and later crops Bean price: more risk than corn (Nov. $10.54?) Options may be useful in managing risks Rent & Land Value Implications

Note Down-side Risk in Grain Exports, Reflecting Foreign Weather & Lagged Price Response

China: a wild card in the corn market projected net China exports: 16 mil. Bu., Future imports likely.

New Crop Corn Seasonal Trend CBOT data Source: U of MN, CFFM, % Odds: Spring Price Exceeds Harvest Price

Why Marketing is Critical W Typical Corn Net Profit Margin, Past Years: $.30/bu. W $.10 increase in Price = 33% increase in Net Returns W Also Works in Reverse

Cash-Flow Risk Ratio: Percent of the crop required to be sold to cover cash-flow costs Formula for computation: Cash-flow break-even price divided by selling price

Net-Worth Risk Ratio The maximum dollars per acre which can be lost in any one year before a predetermined percentage of the equity is lost.

Calculating Net-Worth Risk Ratio Max. dollars of net worth to be placed at risk divided by number of acres = Max.$ that can be risked per acre To compute max. loss per bu. : divide $/A. by normal yld. = $/bu. that can be risked for pre- determined loss of equity

Mktg. Plan Starting point in a mktg plan: financial needs of the business Know your break-even price Know your risk-bearing ability Plan marketing with a goal of at least covering cash-flow needs Look for mktg. & insurance tools to minimize risk of losing the business Role of Offer ContractsRole of Offer Contracts TimingTiming

Key Elements in Grain Contracts Quantity & quality Delivery date Delivery location Pricing formula Quality differentials Adjustments if quality is not met Date Signature of both parties

Basis: Key to Understanding Regional Variations in Price Three Components of Price: Level = Futures Basis Spreads over Time Basis: Cash Price Minus aSpecificFutures Contract price Example: N.C. Iowa Cash $3.29 May $3.63 (4/05/07) Basis?

Before Biofuels Boom

Key Points Starting point in a mktg plan: financial needs of the business Know your break-even price Know your risk-bearing ability Plan marketing with a goal of at least covering cash-flow needs Look for mktg. & insurance tools to minimize risk of losing the business Start Early

Marketing Tools Futures markets Options markets Elevator contracts New-generation contracts Storage on & off the farm Basis as a tool for determining where to sell & a partial answer to the “When to sell?” question

10 Traits of a Successful Grain Marketer 1.Starts Early (before planting) 2.Knows production, storage costs & risk bearing ability 3.Understands basis & mkt. carry 4.Follows several relevant markets daily 5.Manages yield risk with revenue insurance 6.Has discipline to price when goals are reached 7.Knows various contracts & when to use them 8.Relies on good sources of market information 9.Has an exit plan 10.Keeps marketing records & evaluates results

Assignment I Update Cash-flow break-even prices for corn & soybeans using Duffy & Smith “Costs of Crop Production, 2008”