Agricultural Marketing ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911 1

Example Transaction for Marketing Report Details Cash Price Basis Gross Revenue Net Return after Prod. Costs Futures/Options Return Storage and Opportunity Costs Final Net Return

10,000 Bushels of Soybeans Stored at Home Timeline Harvested Nov. 1 Hedged with futures Jan. 10 Offset hedge and sold Apr. 12 So the beans were in storage for 5.4 months

Relevant Prices and Costs Cash Prices: Nov. 1 $11.55 Apr. 12 $13.79 Basis at Sale: -$0.62 Prod. Costs: -$9.45 Futures Prices: Jan. 10 $12.41 Apr. 12 $14.41 Storage Costs: $0.01/month Interest Rate: 7.5%

Costs of Ownership Storage Costs Opportunity Costs 5.4 months * $0.01/bu/month * 10,000 bu $540 or $0.054/bu Opportunity Costs (5.4/12) * $11.55/bu * 7.5% * 10,000 bu $3,900 or $0.39/bu Total $4,440 or $0.444/bu

Futures/Options Return Sold May ’12 Futures on Jan. 10 @ $12.41 Offset by buying May ’12 Futures on Apr. 12 @ $14.41 Paid broker $0.01/bu for the service Per Bushel Return: ($12.41 - $14.41) - $0.01 = -$2.01 Total Return on Hedge: -$20,100

Final Tally Per Bushel Total Cash Price $13.79 $137,900 Production Cost $ 9.45 $ 94,500 $ 4.34 $ 43,400 Costs of Ownership $ 0.444 $ 4,440 $ 3.896 $ 38,960 Futures/Options Return $ 2.01 $ 20,100 Final Net Return $ 1.886 $ 18,860

Historical Comparison

Historical Comparison Average $0.40/bushel For 2011, Captured $1.89/bushel

Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/