Agricultural Marketing ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 1

Multimarket relationships Some futures markets have an obvious technical link Soybeans, Soybean Oil, Soybean meal Soybeans Soybean Oil Soybean Meal

Multimarket relationships Feeder Cattle, Corn, Live Cattle Feeder Cattle Live Cattle (Finished) Corn

Multimarket relationships Weaned pigs, Soybean Meal, Corn, Lean Hogs Weaned Pigs Lean Hogs (Finished) Corn Soybean Meal

Multimarket relationships Processors (producers) use these spreads to hedge production profits Speculators use these spreads to bet on the profitability of that industry Some markets have contracts that trade the spread in one transaction e.g., Soybean Crush

Multimarket relationships Soybean Crush Spread (CME) Leg 1 Soybean meal futures Sell 11 contracts 11*100 tons = 1,100 tons = 50,000 “bu” Leg 2 Soybean oil futures Sell 9 contracts 9*60,000 lbs = 540,000 lbs = 49,090 “bu” Leg 3 Soybean futures Buy 10 contracts 10*5000 bu = 50,000 bu 11:9:10 is the ratio of contracts to make the spread CME Info on the soybean crush spread

Multimarket relationships Soybean Crush Spread The price of the spread is quoted as: What are the 0.022 and the 11 for? Price is quoted on a per bushel basis

Multimarket relationships Meal prices quoted per ton (44/2000 = 0.022) & Oil prices quoted per lb Soybean Crushing Yields Soybeans 1 bushel 60 lbs approx Soybean Oil 11 lbs Soybean Meal 44 lbs meal

Multimarket relationships Soybean Crush Spread The price of the spread is quoted as: So the contract price quotes are per “bushel” profit margins And the Crush Spread is a 50,000 “bushel” contract

http://www2.econ.iastate.edu/margins/cattlecrush.htm

http://www2.econ.iastate.edu/margins/swinecrush.htm

Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2018/index.htm