1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor 1

2. 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

3. Corn Futures Trade
Source: CFTC 3 3

4. Soybean Futures Trade
Source: CFTC 4 4

5. Live Cattle Futures Trade
Source: CFTC 5 5

6. Lean Hogs Futures Trade
Source: CFTC 6 6

7. Bullish Speculator Time Now Later Maturity No futures position
“Long” futures position
No futures position
Time
Now
Later
Maturity
Buy futures contract
Sell contract back
“Open” a “long” futures position
“Close” the “long” position
“Make” a promise
“Offset” the promise

8. Going Long
Bought Dec $3.8500

9. Bearish Speculator Time Now Later Maturity No futures position
“Short” futures position
No futures position
Time
Now
Later
Maturity
Sell futures contract
Buy contract back
“Open” a “short” futures position
“Close” the “short” position
“Make” a promise
“Offset” the promise

10. Going Short
Sold Dec $3.8500

11. 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

12. 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)

13. 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

14. 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

15. Going Short
Sold Dec $3.8500

16. Short Hedge
Hedging Dec $3.8500

17. Going Long
Bought Dec $3.8500

18. Long Hedge
Hedging Dec $3.8500

19. 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

20. Cash Bids Key Coop http://www.keycoop.com/cash-bids Heartland Coop
Cargill
West Central Coop

21. 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)

22. Cash vs. Futures Hedge Cash Sales Futures Hedge
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

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