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

2. Short Hedgers
Producers with a commodity to sell at some point in the future
Are hurt by a price decline
Sell the futures contract initially
Buy the futures contract (offset) when they sell the physical commodity

3. Short Hedge Example
A soybean producer will have 25,000 bushels to sell in November
The short hedge is to protect the producer from falling prices between now and November
Since the farmer is producing the soybeans, they are considered long in soybeans

4. Short Hedge Example
To create an equal and opposite position, the producer would sell 5 November soybean futures contracts
Each contract is for 5,000 bushels
The farmer would short the futures, opposite their long from production
As prices increase (decrease), the futures position loses (gains) value

5. Short Hedge Expected Price
Futures prices when I place the hedge
+ Expected basis at delivery
– Broker commission

6. Short Hedge Example As of Jan. 17,
($ per bushel)
Nov soybean futures $9.4825
Historical basis for Nov. $
Rough commission on trade $
Expected price $9.1725
Come November, the producer is ready to sell soybeans
Prices could be higher or lower
Basis could be narrower or wider than the historical average

7. Prices Went Up, Hist. Basis
In November, buy back futures at $10.50 per bushel
($ per bushel)
Nov soybean futures $
Actual basis for Nov. $
Local cash price $
Net value from futures $
($ $ $0.01)
Net price $

8. Prices Went Down, Hist. Basis
In November, buy back futures at $8.00 per bushel
($ per bushel)
Nov soybean futures $
Actual basis for Nov. $
Local cash price $
Net value from futures $
($ $ $0.01)
Net price $

9. Short Hedge Graph
Hedging Nov $9.4825

10. Prices Went Down, Basis Change
In November, buy back futures at $8.00 per bushel
($ per bushel)
Nov soybean futures $
Actual basis for Nov. $
Local cash price $
Net value from futures $
($ $ $0.01)
Net price $
Basis narrowed, net price improved

11. Long Hedgers
Processors or feeders that plan to buy a commodity in the future
Are hurt by a price increase
Buy the futures initially
Sell the futures contract (offset) when they buy the physical commodity

12. Long Hedge Example
An ethanol plant will buy 50,000 bushels of corn in December
The long hedge is to protect the ethanol plant from rising corn prices between now and December
Since the plant is using the corn, they are considered short in corn

13. Long Hedge Example
To create an equal and opposite position, the plant manager would buy 10 December corn futures contracts
Each contract is for 5,000 bushels
The plant manager would long the futures, opposite their short from usage
As prices increase (decreases), the futures position gains (loses) value

14. Long Hedge Expected Price
Futures prices when I place the hedge
+ Expected basis at delivery
+ Broker commission

15. Long Hedge Example As of Jan. 17,
($ per bushel)
Dec corn futures $
Historical basis for Dec. $
Rough commission on trade $
Expected local net price $
Come December, the plant manager is ready to buy corn to process into ethanol
Prices could be higher or lower
Basis could be narrower or wider than the historical average

16. Prices Went Up, Hist. Basis
In December, sell back futures at $5.00 per bushel
($ per bushel)
Dec corn futures $
Actual basis for Dec. $
Local cash price $
Less net value from futures $
-($ $ $0.01)
Net cost of corn $
Futures gained in value, decreasing net cost of corn to the plant from the cash (spot) price

17. Prices Went Down, Hist. Basis
In December, sell back futures at $3.00 per bushel
($ per bushel)
Dec corn futures $
Actual basis for Dec. $
Local cash price $
Less net value from futures $
-($ $ $0.01)
Net cost of corn $
Futures lost value, increasing net cost of corn to the plant from the cash (spot) value

18. Long Hedge Graph
Hedging Dec $4.0325

19. Prices Went Down, Basis Change
In December, sell back futures at $3.00 per bushel
($ per bushel)
Dec corn futures $
Actual basis for Dec. $
Local cash price $
Less net value from futures $
-($ $ $0.01)
Net cost of corn $
Basis narrowed, net cost of corn increased

20. Hedging Results
In a hedge the net price will differ from expected price only by the amount that the actual basis differs from the expected basis
So basis estimation is critical to successful hedging
Narrowing basis, good for short hedgers, bad for long hedgers
Widening basis, bad for short hedgers, good for long hedgers

21. Class web site: