1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Chad Hart
Associate Professor 1

2. Futures Markets Organized and centralized market
Today’s price for products to be delivered in the future
A mechanism of trading promises of future commodity deliveries among traders

3. Futures and Options Market tools to help manage (share) price risks
Mechanisms to establish commodity trades among participants at a future time
Available from commodity exchanges / futures markets

4. Agricultural Futures Markets
Has some unique features due to the nature of agricultural businesses
Supply comes online a few times during the year
So at harvest, supply spikes, then diminishes until the next harvest
Production decisions are based price forecasts
Planting decisions can be made a full year (or more) before the crop price is realized
Users provide year-round demand
Livestock feeding, biofuel production, food demand 4 4

5. Futures Market Exchanges
Competitive markets
Open out-cry and electronic trading
Centralized pricing
Buyers and sellers are both in the market
Relevant information is conveyed through the bids and offers for the trades
Bid = the price at which a trader would buy the commodity
Offer = the price at which a trader would sell the commodity 5 5

6. CME Group http://www.cmegroup.com/ Products Agricultural commodities
Corn, soy, cattle, hogs, etc.
Energy
Currency
Metals
Weather
Others

7. Futures Contracts
A legally binding contract to make or take delivery of the commodity
Trading the promise to do something in the future
You can “offset” your promise
Standardized contract
Form (weight, grade, specifications)
Time (delivery date)
Place (delivery location)

8. Soybean Futures Form Time 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

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

10. Delivery Points Corn Soybeans Wheat
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report

11. 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

12. 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

13. 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

14. CME Group http://www.cmegroup.com/ Open, High, Low, Last Price
Settlement Price
Volume
Open Interest
Daily Limits

15. Terms and Definitions Basis Bear Bull
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

16. Cash vs. Futures Prices Iowa Corn in 2016
The gap between the lines is the basis.

17. 2016 Basis for Iowa Corn

18. Terms and Definitions Clearing House Commission
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.

19. Terms and Definitions Long position Short 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.

20. Going Short Sold Dec. 2017 Corn @ $3.8675
What type of trader (bull or bear) would go short?
What events would send prices in a favorable direction?

21. Going Long What type of trader (bull or bear) would go long?
Bought Dec $3.8675
What events would send prices in a favorable direction?

22. Class web site: Have a great weekend!
Have a great weekend!