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Chicago Mercantile Exchange information sources. http://www.cmegroup.com/tools-information/index.html. 2008. Next wk. normal. *. 4/28/08. Max. Upside Potential: variable cost of ethanol production, tax credits, And gasoline-ethanol prices . Dec. 08 Corn. Gaps: $5.20, $5.405, $5.598

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chicago mercantile exchange information sources
Chicago Mercantile Exchange information sources

http://www.cmegroup.com/tools-information/index.html

slide4

Max. Upside Potential: variable

cost of ethanol production, tax credits,

And gasoline-ethanol prices

Dec. 08 Corn

Gaps: $5.20, $5.405, $5.598

Major risk: cutting tax credit

For ethanol

slide5

Nov. 08 Soybeans

Down-side Risk: Gap @ $10.54

slide15

Cash Flow Risk Ratio for Corn

Partly from Dr. William Edwards, ISU Economics Department

50/50

1/3-2/3

Crop

April 08

Owners

Renter

Share

Buyer

Cash flow cost per acre

$458

$720

$318

$714

Govt. payments?

-$9

-$9

-$4.50

-$9

Cash needed from sales

$449

$711

$705

$313.5

Expected or actual yield (bu.)

185

185

92.5

185

Cash flow breakeven price

$2.43

$3.84

$3.39

$3.81

Hedged market price ($/bu)

$5.72

$5.72

$5.72

$5.72

Cash flow risk ratio

42%

67%

59%

67%

Cash flow R. R., $4.70 price? 52% 82% 72% 81%

Interpretation: @ $4.70 price, Owners need to sell 52% of

crop to cover cash-flow needs.

slide17

Table 5. Example Net Worth Risk Ratios For Corn in Central Iowa

April 08

OwnersRentersCrop-shareBuyers

000 $ assets$3,350 $357.3$250.21,721.7

000 $ liabilities$0$185.3$84.6$596.0

000 Net worth$3,350 $172.0165.61,125.7

Net worth risked

(10%) 335,00017,20016,560 112,570

Crop acres600600600600Net worth risk ratio$558 $28.67$27.6$187.6

Max.Loss/bu.,norm. yld. $3.02 $0.155 $0.298 $1.01

Price for max. loss -$0.59 $3.68 $3.09 $2.80

Interpretation: A loss of $0.16/bu. (from cash-flow break-even

price would reduce renter’s net worth by 10%.

slide19

Cash Flow Break-even & Risk Ratio for Soybeans

Partly from Dr. William Edwards, ISU Economics Department

50/50

1/3-2/3

April 08

Crop

Owners

Renter

Share

Buyer

$160.5 $523

Cash flow cost per acre

$255

$503

Govt. payments?

-$12

-$12

-$6

-$12

$154.5

Cash needed from sales

$243

$491

$511

Expected or actual yield

50

50

25

50

(

bu

.)/

A

Cash flow breakeven price

$4.86

$9.82

$6.18

$10.22

$11.09

Hedged market price ($/

bu

)

$11.09

$11.09

$11.09

Cash flow risk ratio

44%

56%

92%

89%

Risk Ratio at $9.60/bu. price 51% 102% 64% 106%

Interpretation: @ $11.09 price, Owners need to sell 44% of

crop to cover cash-flow needs.

slide21

Assignment II: Advisory Service Performance

http://www.farmdoc.uiuc.edu/agmas/reports/03_06/text.html

  • Univ. of Illinois does an annual evaluation of Ag Market Advisory
  • Services. You can get the report at the above web address.
  • Assignment: Working individually or in teams of 2-4 people, answer
  • these questions:
  • For the advisory services as a group, how much better in
  • average cents per bushel are they than the average price received
  • by farmers? __________corn _____________ soybeans
  • For the services as a group, how does their average price
  • compare with the 20-month market benchmark? Corn _____
  • Soybeans _______________ .
  • 3. For the services as a group, how does their average price
  • compare with the 24-month market benchmark? _________
  • Corn, _______________ Soybeans.
slide22

http://www.farmdoc.uiuc.edu/agmas/reports/03_06/text.html

  • Univ. of Illinois annual evaluation of Ag Market Advisory
  • Services, assignment, cont.
  • Questions:
  • Has any one advisory service been able to beat the 24 month
  • market benchmark every year over the study period? On Corn? ___
  • _________________. On Soybeans? ____________________.
  • How much does the ranking of individual advisory services vary
  • from year to year? ____________________________ .
  • Brock is an advisory service used by Cargill in some of its
  • Contracts. On average, how has Brock ranked among advisory
  • Services? On corn?________ On soybeans?________
  • Pro Farmer is headquartered in Cedar Falls, Iowa. How has it
  • Ranked among advisory services? On corn?________Soybeans?___
  • _________________________.
slide25

Storage Economics

  • Costs to store on & off farm
  • Seasonality of prices
  • Harvest basis & carrying charge
  • Timing and amount of cash-flow needs
slide26

Post Harvest Seasonal Price Trends

Fact: Since 1990, the May cash corn price has exceeded October in 14 of 17 years (82%).

slide27

Post Harvest Seasonal Price Trends

Fact: Since 1990, the May cash soybean price has exceeded October in 12 of 17 years (71%).

slide28

Carrying Charges and Selling the Carry

CBOT Corn Futures: October 16,2006

What determines price differences between delivery months (e.g. December vs. March corn)? Is it expectations?

These price differences reflect market determined storage costs (aka carrying charges). Large carrying charges, where deferred contracts trade at a premium to nearby contracts, are common when free supplies are large.

slide29

sell tomorrow?!?

Store grain today and…

Carrying Charges and Selling the Carry

slide31

Jewell 4/24/08

Store or sell now?

Market Signals?

April 08

May

June

July

August

FH Sep

LH Sep

October November December January 09 February

March

April 09

slide32

What is the carry?

CBOT Corn FuturesCarrying Chargesat Harvest

slide33

4/23/08

Heart of Iowa Cooperative

slide34

What is the carry?

CBOT Soybean FuturesCarrying Chargesat Harvest

are market prices high
Are Market Prices High?

CBOT July Corn Futures

Years after 1980 when July corn was greater than $2.90 at harvest.

Eight of ten years (80%) the July declined, an average of 3 cents per bushel for all years.

slide36

Sizing Up the Market

Assumes…

8% interest rate

$3.00/bu cash corn

$4.00/bu cash wheat

$7.00/bu cash soybeans

In/out costs* of…

8 cents/bu corn

11 cents/bu soybeans

8 cents/bu wheat

* Based on estimates of NDSU Extension Service

slide37

On-farm Corn Storage Costs7 months (@ $5.78/Bu.)

  • Extra shrink to 13% $0.145
  • Extra drying to 13% 0.04
  • Interest @ 7% 0.236
  • Handling 0.02
  • Quality deterioration (1%) 0.058

Total 0.499

$6.40 May call = $0.90/bu.

slide38

On-farm Corn Storage Costs3 months (@ $5.78/Bu.)

Jewell Price premium, harvest to January = $0.11

  • Extra shrink to 13% $0.00
  • Extra drying to 13% 0.00
  • Interest @ 7% 0.101
  • Handling 0.02
  • Quality deterioration (1%) 0.00

Total 0.121

$6.40 May call = $0.90/bu.

slide39

Off-farm Corn Storage Costs8 months

  • Extra shrink to 14% $0.08
  • Extra drying to 14% 0.03
  • Interest @ 7% 0.27 Handling 0.00
  • Storage 0.225
  • Total 0.605
  • Price-later 0.495
slide40

On-farm Soybean Storage Costs: 3 months @ $11.36/Bu.

Interest @ 7% $0.20

  • Handling 0.02
  • Quality deterioration (1%) 0.00

Total 0.22

HOI Jan. 09 bid vs. Oct. 08 +0.15

slide42

$ Under July futures

Theoretical Seasonal pattern for C. Iowa

July basis

0.0

Transportation cost to Chicago

Storage costs to July delivery

0.25

0.50

Oct. Dec. Feb. April June July

slide45

China: a wild card in the corn market

2007-09 projected net China exports: 16 mil. Bu., Future imports likely.

new crop corn seasonal trend
New Crop Corn Seasonal Trend

75% Odds: Spring Price Exceeds Harvest Price

CBOTdata

Source: U of MN, CFFM, 2007.

slide48

Net-Worth Risk Ratio

  • The maximum dollars per acre which

can be lost in any one year before a predetermined percentage of the

equity is lost.

slide49

Calculating Net-Worth Risk Ratio

  • Max. dollars of net worth to be

placed at risk divided by number of acres = Max.$ that can be risked per acre

  • To compute max. loss per bu. : divide $/A. by normal yld. = $/bu. that can be risked for pre-determined loss of equity
slide50

Mktg. Plan

  • Starting point in a mktg plan: financial needs of the business
  • Know your break-even price
  • Know your risk-bearing ability
  • Plan marketing with a goal of at least covering cash-flow needs
  • Look for mktg. & insurance tools to minimize risk of losing the business
  • Role of Offer Contracts
  • Timing
slide55

Key Points

  • Starting point in a mktg plan: financial needs of the business
  • Know your break-even price
  • Know your risk-bearing ability
  • Plan marketing with a goal of at least covering cash-flow needs
  • Look for mktg. & insurance tools to minimize risk of losing the business Start Early
slide56

Marketing Tools

  • Futures markets
  • Options markets
  • Elevator contracts
  • New-generation contracts
  • Storage on & off the farm
  • Basis as a tool for determining where to
  • sell & a partial answer to the “When to

sell?” question

slide58

10 Traits of a Successful Grain Marketer

  • Starts Early (before planting)
  • Knows production, storage costs & risk bearing ability
  • Understands basis & mkt. carry
  • Follows several relevant markets daily
  • Manages yield risk with revenue insurance
  • Has discipline to price when goals are reached
  • Knows various contracts & when to use them
  • Relies on good sources of market information
  • Has an exit plan
  • Keeps marketing records & evaluates results
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