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

2. Rolling a hedge Definition
To continue to hedge for additional months beyond the expiration of the original contract
Done by offsetting original contract
Simultaneously taking new position in a more distant month
The forward price of the hedge is switched to a more distant maturity

3. Rolling a hedge When would you do this?
Have storage facilities and flexible cash-flow
See an opportunity to obtain additional returns from storage

4. Rolling a hedge: Example
Producer is planning to sell corn in December
On June 2nd, he hedges using Dec. futures
Sell Dec. Futures = $2.85/bu
Expected basis for Dec. = -$0.20/bu
Expected spot price at time of maturity
= $2.65/bu ($2.85 – $0.20)

5. Rolling a hedge: Example
On Nov. 16th
Dec. futures price = $2.38
Mar. futures price = $2.52
Dec.-Mar. spread =-$0.14
Expected basis for Mar. =-$0.15
Storage costs = $0.03/month

6. Rolling a hedge: Example
Offset Dec. futures
Buy back Dec. futures for $2.38
Producer rolls hedge to March
Sell Mar. futures for $2.52
Stores grain from December to March
Cost to store until March: $0.03 X 3mo = $0.09/bu

7. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $0.38 = $2.75
June 2nd
Nov 16th
Mar 14th
Net
Cash
Crop is growing --
Sold physical 2.75
= 2.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
2.90
2.52 – 2.90
= -0.38

8. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $0.38 = $2.75
June 2nd
Nov 16th
Mar 14th
Net
Cash --
Sold physical 2.75
= 2.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
2.90
2.52 – 2.90
= -0.38

9. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $0.38 = $2.75
June 2nd
Nov 16th
Mar 14th
Net
Cash --
Sold physical 2.75
= 2.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
2.90
2.52 – 2.90
= -0.38

10. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $0.38 = $2.75
June 2nd
Nov 16th
Mar 14th
Net
Cash --
Sold physical 2.75
= 2.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
2.90
2.52 – 2.90
= -0.38

11. Rolling a hedge: Example
Suppose he didn’t roll the hedge
i.e., he offset his Dec. futures position and sold in the cash market in December
(Like the examples we’ve had before today)

12. Rolling a hedge: Example
Overall revenue: $ $2.18 = $2.65/bu
June 2nd
Dec 14th
Net
Cash --
Sold physical
2.18
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38 = 0.47
Mar
2.65

13. Rolling a hedge: Example
By rolling the hedge forward, made
$ $2.65 = $0.10/bu
more than he would have if he just closed out his position in December
Net Price = Original Futures Price – Storage Costs + New Futures Price Difference + New Basis
Risky decision because don’t know realized MAR basis at the time of rolling the hedge
If contemplating rolling hedge in DEC, know all components of equation except B2, need to speculate on this value to decide if better off storing or not
DEC/MAR spread is major factor in decision. If market offers enough premium, can probably risk basis fluctuation and roll the hedge

14. Rolling a hedge forward: Review
Rolling a hedge forward is exchanging your current position for one in the more distant future
Another way to bet on basis
If basis narrows (or increases ) the short hedge (or example) makes money
Rolling the hedge forward allows you to take advantage of basis changes when you have already taken a position

15. Calendar Spreads Can be done with futures or options
Taking long and short positions in the same market for different months
Looking to benefit from price changes between the months
Figuring nearby prices move more quickly than deferred prices

16. Bull Spread
Buy futures in the nearby month and sell futures in the deferred month
Target when futures prices are rising
Pays off when nearby futures prices rise faster than deferred futures prices

17. Bull Spread: Example
On March 1, I’m feeling bullish about lean hog futures
July 2019 $77.975/cwt.
Dec $64.525/cwt.
For a bull spread, I buy 1 July futures and sell 1 Dec. futures on March 1

18. Bull Spread: Example On March 29, I want to get out of my bull spread
July 2019 $92.200/cwt.
Dec $72.975/cwt.
So I sell 1 July futures and buy 1 Dec. futures on March 29

19. Bull Spread: Example July Futures Dec. Futures Spread March 1 $77.975
$64.525
$13.450
March 29
$92.200
$72.975
$19.225
July Futures
Dec. Futures
March 1
-$77.975
$64.525
March 29
$92.200
-$72.975
$14.225
-$8.450
$5.775

20. Bear Spread
Sell futures in the nearby month and buy futures in the deferred month
Target when futures prices are falling
Pays off when nearby futures prices fall faster than deferred futures prices

21. Bear Spread: Example
On March 1, I’m feeling bearish about corn futures
July 2019 $3.815/bu
Dec $3.9425/bu
For a bear spread, I sell 1 July futures and buy 1 Dec. futures on March 1

22. Bear Spread: Example On March 29, I want to get out of my bear spread
July 2019 $3.6625/bu
Dec $3.8475/bu
So I buy 1 July futures and sell 1 Dec. futures on March 29

23. Bear Spread: Example July Futures Dec. Futures Spread March 1 $3.8150
$3.9425
$0.1275
March 29
$3.6625
$3.8475
$0.1850
July Futures
Dec. Futures
March 1
$3.8150
-$3.9425
March 29
-$3.6625
$3.8475
$0.1525
-$0.0950
$0.0575

24. Class web site: