econ 337: agricultural marketing
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ECON 337: Agricultural Marketing. Lee Schulz Assistant Professor [email protected] 515-294-3356. Chad Hart Associate Professor [email protected] 515-294-9911. Market Participants. Speculators have no use for the physical commodity - PowerPoint PPT PresentationTRANSCRIPT
ECON 337:Agricultural Marketing
Chad HartAssociate [email protected]
Lee SchulzAssistant [email protected]
Market ParticipantsSpeculators have no use for the physical
commodityThey buy or sell in an attempt to profit from price
movementsAdd liquidity to the market
May be part of the general public, professional traders or investment managersShort-term – “day traders”Long-term – buy or sell and hold
Corn Futures Trade
Source: CFTC
Soybean Futures Trade
Source: CFTC
Live Cattle Futures Trade
Source: CFTC
Lean Hogs Futures Trade
Source: CFTC
Bullish Speculator
Time
Now
Buy futures contract Sell contract back
MaturityLater
“Open” a “long” futures position
“Close” the “long” position
“Long” futures position
No futures position
No futures position
“Make” a promise “Offset” the promise
Bought Dec. 2014 Corn @ $4.47
Going Long
Bearish Speculator
Time
Now
Sell futures contract Buy contract back
MaturityLater
“Open” a “short” futures position
“Close” the “short” position
“Short” futures position
No futures position
No futures position
“Make” a promise “Offset” the promise
Sold Nov. 2014 Soybeans @ $11.09
Going Short
SpeculatorsSpeculators:
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
Why Speculators Like Futures Markets
Relatively little capital requiredInitial 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)
How Would You Speculate? Flooding is projected for Iowa
Reports of a bumper crop in Brazilian soybeans
Rumors of foot and mouth disease in the U.S.
Inflation is projected to rise
Day TradersLooking 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
Sold Nov. 2014 Soybeans @ $11.09
Going Short
Short Hedge
Hedging Nov. 2014 Soybeans @ $11.09
Bought Dec. 2014 Corn @ $4.47
Going Long
Long HedgeHedging Dec. 2014 Corn @ $4.47
Cash Contracts 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 BidsKey Coop http://www.keycoop.com/cash-bids
Heartland Coop https://myaccount.heartlandcoop.com/bids.htm
Cargill http://www.cargillag.com/Marketing/LocalBids/local-bids-center
West Central Coop http://www.west-central.com/grain/west-central-bids/default.aspx
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)
Cash vs. Futures HedgeCash 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/loss Can be easily offset if problems arise
Class web site:http://www.econ.iastate.edu/~chart/Classes/
econ337/Spring2014/
Have a great Super Bowl weekend!