Risk: How Much Can You Handle? Does it Pay to Improve Your Marketing

Marketing ~ The Basics

Price Yield x - Expenses Profit

Price Probability

Selling Curve for Farmers . Selling Curve for Farmers Better than 60% of all corn and soybeans sold by farmers is sold in the bottom 1/3 of the price range Less than 10% of all corn and soybeans sold by farmers is sold in the upper 1/3 of the price range

futures contract & Trading

What Is A Futures Contract? Grains (corn, oats, wheat) - 5000 bu. contract March, May, July, September, December Soybeans - 5000 bu. contract January, March, May, July, August, September, November

Market Quotes ~ Grains www.cbot.com

How Trading is done In Pits Hand signals Bids & Offers Cried Out Prices Reported Trades Reported to Clearing House

You receive news that makes you think corn prices will move lower “Sell 5,000 Bu. Dec. corn at the market” “You sold 5,000 Bu. Dec. Corn at $2.67 Local broker calls you Local Broker receives order Sends to clearing firm desk Desk informs local broker Transaction put on Computer Runner takes order to pit Runner reports to desk Transaction made in pit

basis

Basis The difference between the local cash market and the futures contract at a specific month The difference is due mainly to: Cost to deliver Cost to store Interest cost of commodity over time

Elevator Basis: Basis b/w local elevator & futures contract Local conditions affect basis Generally, in past, not as large as normal basis ($0.50). We seem to be in a new era with basis. Must chart elevator basis in order to use effectively Using this basis causes some risk - due to conditions in a certain year, basis may be wider than charted and calculated

Basis Conditions Narrow Basis - basis is less than normal basis Usually in short crop years signal to sell--no incentive to store sell cash, buy futures good alternative or buy a call Wide Basis - basis is more than normal basis Usually in large crop years Market encourages you to store Hedging is good marketing alternative Inverted Basis - Futures less than local mkt.

Basis Signals If you like the price and the basis, sell cash or make a cash forward sale If you like the price but not the basis, sell futures, use hedge to arrive or buy a put option If you like the basis but not the price, lock in the basis with a basis fixing contract If you don’t like the basis or the price, wait

Grain storage & Hedging

What does it cost to store grain? Interest on Commodity Energy cost to keep grain in condition Shrink Crop going out of condition Cost to maintain the bin Commercial Storage = 3 cents/mo. On Farm Storage = 1.5 to 2 cents/mo.

Things you need to know for a Storage Hedge Basis (Cash Price – Futures Price at a specific futures month) Want wide basis in & narrow basis out Know your normal basis You must own the commodity Usually need 10% margin money

Basis Cash Net Hedging Example Futures -$1.00 Local Price = $2.50 $3.50 Sell Futures -$0.50 Sell Local $2.20 $2.70 Buy Futures Basis Gain +$0.50 Local Sale -$0.30 +$0.80 Futures Net +$0.50

What price did I receive? Sold my crop to the local elevator for $2.20 Received profit from the futures contract $0.80 Priced received for grain $3.00

Hedge to Arrive Contract Contract with local elevator to hedge your grain through them at a fee, usually cost/bu. The elevator makes the margin call Do Not have to hedge in 5000 bu. amount Must sell to elevator you have contract with. Gives you market flexibility of hedge.

Hedge-To-Arrive Advantages Cost of hedge is known Do not need line of credit to meet margin call Be sure contract does not include clauses for margin call Do not need to know about futures trading Do not tie up capital in margin account Not restrained by contract size You can choose when to lock in Basis

Options Marketing – What Is It? The Buyer of an option (farmer) acquires the right, but not the obligation, to buy or sell an underlying commodity in the future’s market in exchange for payment of a premium Right to buy or sell a futures contract In other words, the option (not the obligation) to go short or long in the mkt I don’t have to if don’t want to – can expire I pay a premium for the privilege to cancel

Options marketing

Options – The Purpose Protects you from a price drop or increase Put a Floor or Ceiling on price Price increase/decrease (depending on future’s position) will not work against you (unlike future’s market) – just don’t exercise May be considered an insurance against price drop or increase The insurance Company—The options seller, insures a price for your grain The Seller receives a premium for taking on your risk. You have limited your risk to the premium.

Options Marketing Basically like putting Earnest Money down on a house you want to buy If you put the money down & buy – these funds go towards the house purchase price If you put the money down & back out – these dollars are lost (the sellers get to keep it) Expires? On the 20th of the month before the future’s contract month.

Puts The right to sell a futures contract (go short) Protects from price decline – sets floor If option is exercised, you own a short position futures contract Brokerage fee, margin acct, & now hedged Lock in a price bottom, but still get increased price if the market rises Put premium value declines to zero as the market rises. Increases as the market falls. Your strike price is then above the market price. (Sell High)

Call The right to buy a futures contract (go long) Protection from price rise – sets ceiling If option is exercised, you own a long position futures contract Lock in a price but still get decreased price if the market falls Call premium value increases as the market rises. (Your strike price is below the market – buy low). Decreases to zero as market falls.

Strike Price Price at which an option is exercised Price you’re insuring – guaranteed price Premium is based off Strike Price’s relationship to the Futures Market Price of the day Based on: Intrinsic Value – always positive value; money that could be realized now by exercising the option with given strike price Time Value – time before expiration, market volatility, & interest rates

In the Money, At the Money, Out of the Money Relationship of Futures contract to strike price. In the money —exercising would result in profit from the futures transaction. Call’s strike is below the futures Put’s strike is above the futures At the money —futures price and strike price are the same or nearly the same Out of the money —no profit from exercising Only time value in the premium

Your Rights As An Option Owner First Let Option expire worthless No follow-up needed Sell Back Cash in premium value Exercise Take short position in the futures (if put) Offset contract when you sell grain If speculating, offset contract when you have reached your price goal Now Hedged Gives a whole layer of trading beyond future’s

Analyzing the market

Factors Affecting Price Movement There are 2 Factors in the Market Affecting Price: Fundamentals – supply & demand; what farmers talk about most Technicals – charting and watching market movements ** Eventually the Fundamentals win **

Fundamental Analysis – The Laws of Economics When prices go up, what happens? Increased production Decreased consumption When prices get lower, what happens? Decrease production Increased consumption Fundamentals used as a 1 year look ahead Use fundamentals to establish price odds & pricing goals

Fundamental Analysis Factors Weather ** Key Factor Gold—Metals Transportation Dock Strikes, Trucker Strikes USDA Reports Disease Exports—Imports Actions of other Countries Government Programs Reserves Embargos Domestic Use Interest Rates Value of the Dollar Inflation

Technical Analysis Charting what is happening in the market Used for short term strategy More what the speculators and funds buyers use Do I sell today or wait for tomorrow? Bar Charts help you spot tops and bottoms Ex: Key Reversals—have 86% reliability record in soybeans

Cycles and Seasonals You need to be alert enough to market trends to know what is not typical Harvest low After Harvest Recovery – Dec/Jan Winter Blahs – steady in Feb/March Summer Recovery – up from April through July Down to Harvest “The Trend is Your Friend” Do opposite of everyone else – probably right!?!? Successful people do what others don’t want to

Developing a market plan

Marketing Plan Factors – Pulling It Together Personal Feelings and Attitudes What type of a marketer are you? Speculator Businessperson Financial Needs of the Business Cost of production Cash flow needs Seasonal Patterns/Price Trends Price Outlook—Market Information Know the tools you have to use

What is the basic information you need to develop a marketing plan? Determine the amounts of grain to sell Determine the marketing tools you want to use The more tools in your tool box, the more likely you are to reach your marketing goal Determine when to sell May have a price in mind, but remember a time deadline too Form a realistic price goal Farther you are away from marketing the grain, the higher the price should be

Corn Prices – Normal Seasonal Pattern

Soybean Prices – Normal Seasonal Pattern

PRICING DEADLINES March 31 for pre-plant season Planting intentions report June 30 for growing season Crop size generally known ** As soon unknowns are knowns the market tends to drop – Uncertainty = Volatility in the market Same dates apply for stored crop--all sold by June 30 YOU MUST SELL BY YOUR DEADLINE – PLANS DON’T WORK WITHOUT DATES

Picking the Proper Marketing Tool