grain marketing strategies 1 - marty hibbs, grain merchandiser

Marketing Seminar

FUTURES & OPTIONS MARKETS

January 25, 2017

Ingersol, ON

Marty Hibbs

Your Marketing Choices

• Cash Sales

• GFO Pool

• Forward Contracts

• Futures & Options Markets

Purpose of Futures Markets

• Raw Material Hedging

• Buyers and Sellers of raw materials are at risk of price

fluctuations.

• These market participants include buyers and sellers for every

major company globally as well as producers, end users and

speculators.

• This pool of experts pinpoint settlement prices on the world’s

major exchanges.

Futures Market

Pros

• Easy to enter/exit

• Often better prices than

forward contracts

• Use of Margin (leverage)

Cons

• Fixed quantity

• Some Commissions

• Ignores Basis

Viewed as a temporary lock in for price until physical is

ready to be delivered or purchased.

Each contract is standardized by exchange, quality,

quantity and settlement and may be offset easily.

Purpose of Futures Markets

• Price Discovery

• Hedge or reduce one’s risk

Buyers Sellers

..for largest raw materials

Global management systems on the

planet

How Big is the

CME Exchange?

Price Discovery

CORN 340,500 Contracts Average Daily Volume

SOYBEANS 245,000 Contracts Average Daily Volume

WHEAT 123,600 Contracts Average Daily Volume

CORN WHEAT & SOYBEANS

Just these three grains trade more than

700,000 contracts

every day on the CME !!

Worth an estimated

$20,766,200,000.00 /Day

CME Total Contract Volume for 2015

The CME traded more than

13.7 million contracts worth more than

1 Quadrillion Dollars

$1,000,000,000,000,000.00

Futures Contract Categories

• Grains: Corn, Wheat, Beans, Oats etc.

• Meats: Live Cattle, Lean Hogs, Feeders

• Energy: Crude Oil, Heating Oil, etc.

• Softs: Sugar, Cotton, Cocoa, Coffee

• Currencies: Canadian, Swiss, Yen, etc.

• Interest Rates: Treasuries, T Bills, etc.

• Indexes: S&P, Nasdaq, Dow Jones, etc.

• Metals: Gold, Silver, Copper, Palladium, etc.

Future Contract Specifications

Sym Contract Exch Trading Hours Size Months Tick Value

ZW Wheat CBOT 8:00p.m. - 8:45a.m.

and 9:30a.m. -

2:15p.m. (Sun-Fri) EST

5,000

bushels

HKNUZ 1/4 cent per bushel

($12.50 per contract)

ZC Corn CBOT 8:00p.m. - 8:45a.m.

and 9:30a.m. -

2:15p.m. (Sun-Fri) EST

5,000

bushels

HKNUZ 1/4 cent per bushel

($12.50 per contract)

ZS Soybeans CBOT 8:00p.m. - 8:45a.m.

and 9:30a.m. -

2:15p.m. (Sun-Fri) EST

5,000

bushels

FHKNQUX 1/4 cent per bushel

($12.50 per contract)

MW Spring

Wheat

MGEX 8:00p.m. - 8:45a.m.

and 9:30a.m. -

2:15p.m. (Sun-Fri) EST

5,000

bushels

HKNUZ 1/4 cent per bushel

($12.50 per contract)

Hedging your risk

Taking a position in the futures market equal and opposite of the

cash market to minimize risk of a financial loss from an adverse

price change.

• If you “hedge,” you buy or sell a futures contract as a

temporary substitute for a cash

• market transaction to be made at a later date.

• management tool used to manage price risk.

Buyer of cash grain = sell grain futures

Seller cash grain = buy grain futures

Types of Hedgers

• The short hedge, or selling hedge, used when you plan to sell a commodity. The short hedge protects the seller of a commodity against falling prices.

• Farmers, Gold miners, producers raw materials

• The long hedge, or buying hedge, used when you plan to purchase a commodity. The long hedge protects the buyer of a commodity against rising prices.

• End Users, Manufacturers in need of raw materials, Airline companies, Trucking firms, home builders.

Short Hedge Example

• March Corn futures trading at $3.50

Sell March corn futures at $3.50

March 1st Futures trading at $3.15

Buy March corn futures at $3.15

Profit on futures $3.50 – $3.15 = $0.35

Net profit: $0.35 x 5000 = $1,750.00

This will help offset losses in physical corn

Note: Basis is not included in this example

Performance Bond (Margin)

Performance Bond (Margin)

• Initial Margin Good will deposit on execution

• Maintenance Margin Demand for adjusted for day to day profits/losses

• Leverage Use of deposit only to secure full contract value.

Mark to Market

• Accounts are settled each day showing

• Account balances including profits and losses at that point

• Snapshot of Account Balances profits and losses at that point

• Margin requirements for all positions

• Margin Excess including profitable positions

• Margin shortfall including unprofitable positions.

Margin and Account Calculations

Day Market Action Contract Value Debit/Credit Account Account Balance Margin Position

1 Deposit $1,200 $1,200 $1,200

3 Close $3.90 $19,500 $1,700

4 Close $3.70 $18,500 $2,700

5 Close $4.00 $20,000 $1,200

6 Close $4.05 $20,250 $950

7 Close $4.07 $20,350 $850

8 Close $4.12 $20,600 $600 -$600

9 Deposit $600 $20,600 Deposit $600 $1,200

9 Close $4.10 $20,500 $1,300

10 Close $4.00 $20,000 $1,800

CORN CONTRACT

Initial Margin $1200

Maintenance Margin $800

Sell 1 Dec Corn

@ 4.00/bu2 $20,000 $1,200

Futures Market Participants

• Exchange The playing field

• Clearing House Settlement agency

• Speculators Looking to take on risk

• Hedgers Avoid risk

Clearing House

• Responsible for the day-to-day settlement of all customer

accounts at futures exchanges.

• Act as a third party to all trades, serving as buyer to every

seller and seller to every buyer, and guarantor of all contracts.

Speculators

• Risk Taker

• Adds Liquidity

• Allows true Price discovery

Calculating Profit & Loss

• Determine contract size

• Determine point value

• Determine points lost or made

• Multiply by contract size

• Add commission to Loss

• Subtract Commission from profit

Wheat Trade Example

Bought 1 Dec Wheat @ 4.00

Sold 1 Dec Wheat @ 4.45

+0.45

0.45 x 5,000 bu = $2,250 profit – commissions

Sold 1 Dec Wheat @ 4.25

Bought 1 Dec Wheat @ 3.80

+0.45

0.45 x 5,000 bu = $2,250 profit – commissions

Bought 1 Dec Wheat @ 4.25

Sold 1 Dec Wheat @ 3.80

-0.45

-0.45 x 5,000 bu = $2,250 loss + commissions

Currency Factor

• Wheat Cash Price: $5.00 Bu. (in $US)

• Scenario A) Canadian Dollar: at par 1.00

• Cash Price $5.00/bu ($183.72/mt)

• Scenario A) Canadian Dollar: 0.9000

$1US / 0.90 = 1.111

$5.00 x 1.111 = $5.55/ bu ($203.93/mt) Cash Price

• Scenario B) Canadian Dollar: 0.7000

$1US / 0.70 = 1.43

$5.00 x 1.43 = $7.15/ bus ($262.72/mt) Cash Price

The True Trend

• Short Term Trends vs Long Term Trends

• Weekly and Monthly Charts ID major Trend.

• Trends usually stay intact for 2 – 6 years or more

• Daily Charts used for entry exit points

• Hourly and minute charts used for fine tuning entry and exit

mostly for day-trading.

OHLC Bar Chart

Intermediate Trend Wheat

Monthly Wheat

Thank you

Questions?

QUIZ TIME