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Commodity Marketing (futures) Mathematical Applications in Agriculture.

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Presentation on theme: "Commodity Marketing (futures) Mathematical Applications in Agriculture."— Presentation transcript:

1 Commodity Marketing (futures) Mathematical Applications in Agriculture

2 Agribusiness Producers Early Agriculturalists sold commodities at market price at the time of selling. – Today, production agriculturalists use current production, capital, and labor strategies to make prices. – Forward Contracts- A cash contract in which a seller agrees to a price for a specific commodity sometime in the future. – Commodity- A transportable resource product with commercial value.

3 Commodity Markets Originated in Chicago in the 1800s to help producers reduce price risk. – Standards developed Beef Grading Standards – Commercial – Select – Choice – Avg. Choice – High Choice – Prime – Bushels per acre/ 56 lbs.

4 Commodity Markets 1848- Establishment of the Chicago Board of Trade. Created a centralized marketplace to exchange commodities between buyers and sellers. 1865- CBOT created futures contracts. Futures Contracts- To buy or sell a commodity in the future. A futures contract specifies quantity, quality, time and price.

5 Margining Systems To prevent problems of not fulfilling contracts, margining systems were initiated. Margining systems required the seller to deposit funds to guarantee the product they were selling.

6 Exchanges do not trade physically Prices are negotiated not actually physical product being traded. – Contract specifies certain month that product will be delivered.

7 What does a contract look like? Contract Specifications Name of Commodity: Corn Where is it traded: Chicago Board of Trade Contract Months: March, April, May, June, July Contract Size: 5,000 bu. Price per bushel in 14 bushel increments.

8 Determining Value of Futures Contract To figure value of commodity: value = settlement price x contract size Minimum price fluctuations- The smallest price at which a futures contract trades.

9 Determining Profit on Futures Contract Example: Jul. 1 BUY Dec. Corn futures at $2.50/bu. Jul. 30 SELL Dec. Corn futures at $2.55/bu. _______________________________________ Profit $0.5/bu.

10 Hedgers and Speculators Headgers- Own or will own actual cash commodity. Speculators- Buy and sell futures contracts and hope to make profit by predicting market movements.

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