Transcript Extension and Outreach/Department of Economics

Crop Marketing
Winnebago County Grain Marketing
Thompson, Iowa
Jan. 19, 2016
Chad Hart
Associate Professor/Crop Markets Specialist
[email protected]
515-294-9911
Extension and Outreach/Department of Economics
Marketing
A series of events and services to create, modify,
and transport a product from initial creation to
consumption
Possible steps:
Planning
Production
Inspection
Transport
Storage
Processing
Sale
Market players:
Producers
Elevators
Processors
Transport companies
Banks/Insurance companies
Traders
Feeders
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Cash Markets
A market where physical commodities are traded
Local elevators
Ethanol plants & soybean crushers
River terminals
Feeders/feed mills
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Futures Markets
A market where contracts for physical commodities are
traded, the contracts set the terms of quantity, quality,
and delivery
Chicago: Corn, soybeans, cattle, hogs
Along with wheat (soft red), oats, rice
Kansas City: Wheat (hard red winter)
Minneapolis: Wheat (hard red spring)
Tokyo: Corn, soybeans, coffee, sugar
Has a market for Non-GMO soybeans
Other markets in Argentina, Brazil, China, and Europe
Extension and Outreach/Department of Economics
The Cash and Futures Markets Are Related
Basis = Cash price – Futures price
Rearranging terms:
Cash price = Futures price + Basis
So national (and international) events can
affect local prices
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Cash vs. Futures Prices
Iowa Corn in 2015
The gap between the lines is the basis.
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2015 Basis for Iowa Corn
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Agricultural Markets
Has some unique features due to the nature of agricultural
businesses
Supply comes online a few times during the year
So at harvest, supply spikes, then diminishes until the
next harvest
Production decisions are based price forecasts
Planting decisions can be made a full year (or more)
before the crop price is realized
Users provide year-round demand
Livestock feeding, biofuel production, food demand
Extension and Outreach/Department of Economics
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
Extension and Outreach/Department of Economics
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?
Forest City (15 miles)
Kiester, MN (15 miles)
Albert Lea, MN (35 miles) Clear Lake (35 miles)
Extension and Outreach/Department of Economics
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/loss
 Can be easily offset if problems arise
Extension and Outreach/Department of Economics
Average Iowa Corn Basis, 2007-11
Source:
http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Extension and Outreach/Department of Economics
Seasonal Patterns
A price pattern that repeats itself with some
degree of accuracy year after year.
Supply and demand
Often sound reasons
Widely known
Linked to storage cost or basis patterns in
grains
Linked to conception and gestation in livestock
Extension and Outreach/Department of Economics
Seasonal Pricing Patterns
Source: USDA, NASS,
Monthly Price Data 1980-2013
Extension and Outreach/Department of Economics
Cost of Ownership
Carry shows the additional revenue that can be
obtained from holding on to the crop
But there are costs to holding on:
storage
interest/opportunity costs
These are known as the cost of ownership
If the carry more than covers the cost of ownership,
then it’s referred to as “full carry”
Extension and Outreach/Department of Economics
Corn Cost of Ownership
Assumption: Corn is Valued at
$3.50/bu Financed @ 5% APR
Extension and Outreach/Department of Economics
Carry (or Spread)
The price difference between futures contracts
Compare the carry offered by the market to the costs
of storing grain from one delivery month to the next.
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Corn Futures Carry
Date: 4/10/15
July $4.26
May $4.20
Mar $4.13
Dec $4.02
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Corn Futures Carry
Date: 11/17/11
Date: 4/3/12
May $6.58
July $6.34
May $6.30
July $6.53
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Inverse Carry
When further out futures are priced at a discount to
nearby futures
Usually occurs when demand is strong and the need
for the crop is immediate
Can also occur during short crop situations or when
there is a large crop coming in after a tight stock
situation
Basis is usually stronger in an inverse market
Extension and Outreach/Department of Economics
Corn Futures Carry
Date: 4/12/13
May $6.58
July $6.41
Sept $5.77
Extension and Outreach/Department of Economics
Short Hedgers
Producers with a commodity to sell at
some point in the future
Are hurt by a price decline
Sell the futures contract initially
Buy the futures contract (offset) when they
sell the physical commodity
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Short Hedge Expected Price
 Expected price =
Futures prices when I place the hedge
+ Expected basis at delivery
– Broker commission
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Short Hedge Example
 As of Jan. 15,
Nov. 2016 soybean futures
Historical basis for Nov.
Rough commission on trade
Expected price
($ per bushel)
$ 8.85
$-0.30
$-0.01
$ 8.54
 Come November, the producer is ready to sell
soybeans
 Prices could be higher or lower
 Basis could be narrower or wider than the historical
average
Extension and Outreach/Department of Economics
Prices Went Up, Hist. Basis
 In November, buy back futures at $10.50 per
bushel
Nov. 2016 soybean futures
Actual basis for Nov.
Local cash price
Net value from futures
($ per bushel)
$10.50
$-0.30
$10.20
$-1.66
($8.85 - $10.50 - $0.01)
Net price
Extension and Outreach/Department of Economics
$ 8.54
Prices Went Down, Hist. Basis
 In November, buy back futures at $7.00 per
bushel
Nov. 2016 soybean futures
Actual basis for Nov.
Local cash price
Net value from futures
($ per bushel)
$ 7.00
$-0.30
$ 6.70
$ 1.84
($8.85 - $7.00 - $0.01)
Net price
Extension and Outreach/Department of Economics
$ 8.54
Short Hedge Graph
Hedging Nov. 2016 Soybeans @ $8.85
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Prices Went Down, Basis Change
 In November, buy back futures at $7.00 per
bushel
Nov. 2016 soybean futures
Actual basis for Nov.
Local cash price
Net value from futures
($ per bushel)
$ 7.00
$-0.10
$ 6.90
$ 1.84
($8.85 - $7.00 - $0.01)
Net price
 Basis narrowed, net price improved
Extension and Outreach/Department of Economics
$ 8.74
Options
 What are options?
 An option is the right, but not the obligation, to buy or
sell an item at a predetermined price within a specific
time period.
 Options on futures are the right to buy or sell a
specific futures contract.
 Option buyers pay a price (premium) for the
rights contained in the option.
Extension and Outreach/Department of Economics
Option Types
 Two types of options: Puts and Calls
 A put option contains the right to sell a
futures contract.
 A call option contains the right to buy a
futures contract.
 Puts and calls are not opposite positions in
the same market. They do not offset each
other. They are different markets.
Extension and Outreach/Department of Economics
Options as Price Insurance
The person wanting price protection (the
buyer) pays the option premium.
If damage occurs (price moves in the
wrong direction), the buyer is reimbursed
for damages.
The seller keeps the premium, but must
pay for damages.
Extension and Outreach/Department of Economics
Strike Prices
The predetermined prices for the trade of
the futures in the options
They set the level of price insurance
Range of strike prices determined by the
futures exchange
Extension and Outreach/Department of Economics
Setting a Floor Price
 Short hedger
 Buy put option
 Floor Price =
Strike Price + Basis – Premium – Commission
 At maturity
 If futures < strike, then Net Price = Floor Price
 If futures > strike,
then Net Price = Cash – Premium – Commission
Extension and Outreach/Department of Economics
Put Option Graph
Dec. 2015 Corn Futures @ $4.0275
Strike Price @ $4.00
Put Option Return =
Max(0, Strike Price – Futures Price) – Premium – Commission
Premium = $0.33625
Commission = $0.01
Extension and Outreach/Department of Economics
Put Option Graph
Dec. 2015 Corn Futures @ $4.0275
Strike Price @ $4.00
Premium = $0.33625
Net = Cash Price + Put Option Return
Extension and Outreach/Department of Economics
Call Option Graph
Dec. 2015 Corn Futures @ $4.0275
Strike Price @ $4.00
Call Option Return =
Max(0, Futures Price – Strike Price) – Premium – Commission
Premium = $0.36375
Commission = $0.01
Extension and Outreach/Department of Economics
Thank you for your time!
Any questions?
My web site:
http://www2.econ.iastate.edu/faculty/hart/
Iowa Farm Outlook:
http://www2.econ.iastate.edu/ifo/
Ag Decision Maker:
http://www.extension.iastate.edu/agdm/
Extension and Outreach/Department of Economics