Animal Science and the Industry Reminder: Student activities are at the end of this PowerPoint Presentation!

Animal Science and the Industry

Common Core/Next Generation Science Standards Addressed CCSS.ELA-Literacy.RH.9-10.4 - Determine the meaning of words and phrases as they are used in a text, including vocabulary describing political, social, or economic aspects of history/social science. WHST.9-12.9 - Draw evidence from informational texts to support analysis, reflection, and research. (HS-PS1-3 HSA-SSE.A.1 - Interpret expressions that represent a quantity in terms of its context. (HS-PS2-1),(HS-PS2-4)

Bell Work What is a future ? What is a market ? Name 3 places you can check the futures market

Understanding Futures Contracts and Governmental Programs

Interest Approach Tell students that you will give them one point for each extra credit assignment they turn in today. Next, tell them you might give them three points for each extra credit assignment they turn in next week, but they have to do them today. Ask the students which they would prefer, one point today or maybe three points next week. Is it worth hurrying to get them done if you only get one point instead of three?

Student Learning Objectives Describe the futures market Describe Hedging Explain margin calls and option contracts

Terms Basis Futures price Hedging Margin Put

What is the futures market? It is the complex system of selling commodities using forward pricing Uses futures pricing in trading commodities Refer back to interest approach. Ask students to reconsider what they’d do if each extra credit sheet was not worth $20. Do any of the responses change? Why or why not?

Future price is the quoted price for a commodity to be delivered in a pre-determined month.

This does not guarantee the actual price of the commodity, it is only an estimate. Actual price will be based on a number of factors present in the future.

What is hedging? Hedging is the use of futures market to set a price for future commodities (in other words to protect oneself against loss on (a bet or investment) by making balancing or compensating transactions. In order to set the selling price, producers must sell a futures contract ensuring the delivery of their commodity at a specific time.

Examples of hedging. An airline company, for instance, may want to use futures to enter into an agreement with a fuel company to buy a fixed amount of jet fuel for a fixed price for a fixed period of time. This transaction in the futures markets allows the airline to hedge or protect themselves against the extreme price changes of jet fuel. http://www.dummies.com/how-to/content/an-introduction-to-commodities-futures-markets.html

Examples of hedging. NAPI (Navajo Agricultural Products Industry) in Farmington produces wheat. In case of low wheat prices, they buy a flour mill so they can hedge the price of wheat. In other words, when wheat prices are low, they can turn it into flour and sell their wheat in the form of flour and at the very least break even.

What is hedging? True hedge involves the producer selling their commodity on the cash market and buying back the futures contract at the same time. Basis is the difference in price between these two transactions.

Difference is commonly the cost of transportation. Ex. Transportation costs are high for livestock, therefore the basis for livestock is negative.

Basis risk occurs when the basis is higher than the anticipated basis. To prevent loss, the producer can follow through with the original futures contract. Producer must be sure that the product meets the contract specifications.

What are margin calls and option contracts? A margin call occurs when the contract holder has to put up a margin. Margin is a minimal amount of money paid towards a futures contract or a downpayment.

Margin calls can be troublesome because they require a large sum of money on short notice.

Before placing a hedge it is important to know the cost of producing the product and have extra money available to meet any unexpected margin calls.

There are options available to help eliminate margin calls One option is called a put Put is a contract that allows the producer to back out of the trade. Similar to an insurance policy for the seller, they are guaranteed the price they want to sell at.

The other option is a call option A call option gives the buyer the right to force the seller to sell on demand. This is like an insurance policy for the buyer, they are guaranteed the price they want to buy at. To reinforce this objective, ask students to think about buying a car. Suppose the car is available now but they don’t have enough money. Compare this situation with a put option and call option. Who would benefit in the car deal in each of these situations.

Review What is the futures market? What is hedging? What are margin calls and option contracts?

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