Transcript Commodity Marketing Activity

Commodity Marketing Activity
Chapter One
Marketing History
• Chicago 1840’s - merchants buy corn from
farmers
• 1850’s - merchants buy corn on time
contracts (forward contracts) to be delivered
at a later date to minimize risk
• Speculators appeared, buying and selling
forward contracts, not intending to take
delivery of the corn, but make a profit
Marketing History
• Forward Contracts were traded on street
curbs and in public squares
• 1850’s Chicago merchants began trading
forward contracts for wheat for eastern
millers and exporters
• Board of Trade in Chicago had been
established in 1848 to promote commerce
Marketing History
• 1859 State of Illinois authorized Board to
establish quality standards, measure, gauge,
weigh, and inspect grain
• Trading moved from the street to the Board
of Trade
• At first, very disorganized: people
disappeared before delivery, others couldn’t
pay
Marketing History
• 1865 Board required a “Margin”,
standardized contract terms for quantity,
quality, delivery procedures, and payment
terms
• These standardized agreements were called
Futures Contracts
• Grain Exchanges formed in Minneapolis,
Duluth, Milwaukee, Omaha, Kansas City, St.
Louis, Toledo, Baltimore, San Francisco, New
York
Marketing History
• Chicago Mercantile Exchange in 1874
(Chicago Produce Exchange) for butter,
eggs, poultry, and other farm products
• Exchanges continue to evolve as need arises
• Durum Futures contracts in Minneapolis
Marketing History
• 1922 Grain Futures Act - regulate trading
• 1936 Commodity Exchange Act made it
illegal to “fix prices”
• 1974 Commodity Futures Trading Act est.
the Commodity Futures Trading
Commission as the independent federal
body that oversees all futures trading in
U.S.
• Exchanges today page 5
The Participants
• Commodity Exchange: place to trade, rules
• Clearing House: day-to-day settlement of all
accounts, guarantees all contracts
• Brokerage House: places orders for
contracts for businesses or individuals
(commission)
• Traders: buys & sells contracts on the
exchange floor in open outcry
Traders
• Private Speculator: try to make money
buying & selling
– Day Trader: close their position before the end
of the trading day
– Position Trader: take relatively large positions
in market and hold their position for a long time
• Floor Broker: agent for customers
• Hedger: use futures to offset risk of
changing prices in the cash market.
Transfer risk to speculators
Marketing Choices
• Cash Sales: deliver your crop to elevator etc.
• Forward Contract: negotiate now for delivery
later
• Futures Contract: agreement to buy or sell at a
date in the future
• Hedging: minimize risk in cash market
• Options on Futures Contracts: right, but not
the obligation to buy or sell a futures contract
at a specified price
Hedging
• You have wheat
• You sell wheat futures contract
• If prices fall, you sell your wheat at the
lower price, but realize a gain in the futures
market
• If prices rise, works the opposite way
• Price is lock in
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Cash Markets
Basis: Cash Price - Futures Price
Ex: $2.40 - $2.60 = -$.20 or 20 cents under
Ex: $2.55 - $2.54 = $.01 or 1 cent over
Deferred Pricing Agreement: deliver
commodity, agree to set a price later
• Basis Contract: type of Forward Contract, lock
in a basis relating to a specified futures
contract.
– Ex: basis -$.20 Cash = $2.64 at selling time
– you will get $2.44