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ECON 337: Agricultural Marketing

Learn about the role of speculators in agricultural markets and how cash contracts can be used to manage risk. Explore the benefits and considerations of cash sales and futures hedging.

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ECON 337: Agricultural Marketing

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  1. ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911

  2. Corn Weekly Tracking Table

  3. Soybean Weekly Tracking Table

  4. 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 Market Participants

  5. Corn Futures Trade Source: CFTC

  6. Soybean Futures Trade Source: CFTC

  7. Bullish Speculator 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. 2012 Corn @ $5.84 on Jan. 9

  9. Bearish Speculator 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 Nov. 2012 Soybeans @ $12.22 on Jan. 9

  11. 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 Speculators

  12. 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) Why Speculators Like Futures Markets

  13. Drought conditions are projected for the Corn Belt Reports of a bumper crop in Brazilian soybeans China is rumored to be in the market for corn Inflation is projected to rise How Would You Speculate?

  14. 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 Day Traders

  15. Going Short

  16. Short Hedge

  17. Going Long

  18. Long Hedge

  19. 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 Cash Contracts

  20. Cash Bids Key Coop, Gilbert http://dtn.keycoop.com/index.cfm?show=11&mid=3&locationID=7 Key Coop, Lincolnway Energy http://dtn.keycoop.com/index.cfm?show=11&mid=3&commodity=LWE Heartland Coop https://myaccount.heartlandcoop.com/bids.htm Cargill http://www.cargillag.com/marketing/localbidscenter.aspx West Central Coop http://www.west-central.com/grain/west-central-bids/default.aspx

  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 • Locks in full price and delivery terms • No margin requirements • Futures Hedge • Locks in futures price, but leaves basis open • Could see price improvement • Can be easily offset if problems arise

  23. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/ Have a great weekend!

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