Agricultural Marketing ECON 337: Agricultural Marketing Lee Schulz Associate Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911 1

Margin Accounts Margin is a critical concept for those trading commodity futures & derivatives in all asset classes. Futures margin is a good-faith deposit, or an amount of capital one needs to post or deposit to control a futures contract. The margin is a down payment on the full contract value of a futures contract. Futures exchanges determine and set margin rates. At times, brokerage companies will add an extra premium to the minimum exchange margin rate to lower risk exposure.

Margin Accounts To trade, you must create a margin account with at least the “Initial” amount and maintain at least the “Maintenance” amount in the account at the end of each trading day. Speculative ("Spec") /non-member initial margin requirements for all products are set at 110% of the maintenance margin requirement for a given product. Hedger/member initial margin requirements for all products are set at 100% of the maintenance margin requirement for a given product.

Margin Accounts Commodity Trader Type Initial Maintenance Corn Hedger $ 550 $ 550 Soybeans Hedger $1,300 $1,300 Soybean Meal Hedger $1,000 $1,000 Lean Hogs Hedger $1,200 $1,200 Live Cattle Hedger $1,500 $1,500 Feeder Cattle Hedger $2,800 $2,800 Corn Speculator $ 605 $ 550 Soybeans Speculator $1,430 $1,300 Soybean Meal Speculator $1,100 $1,000 Lean Hogs Speculator $1,320 $1,200 Live Cattle Speculator $1,650 $1,500 Feeder Cattle Speculator $3,080 $2,800

Margin Accounts Outrights/Vol Scans for Margins http://www.cmegroup.com/clearing/margins/outright-vol-scans.html/?redirect=/margins#sortField=exchange&sortAsc=true&pageNumber=1 Performance Bonds/Margins http://www.cmegroup.com/clearing/risk-management/performance-bonds-margins.html List of Historical Margins by Name http://www.cmegroup.com/clearing/risk-management/historical-margins.html Margin Guide https://www.rjobrien.com/documents/shared/margins/margins.pdf

Margin Calls Margin accounts are rebalanced each day Depending on the value of futures Settlement price If your position is losing value, money is taken out of the margin account to cover the loss. If the account value falls below the “Maintenance” level, you receive a margin call (a call to put additional money in your margin account) and the balance is brought back up to the “Initial” amount.

Margin Example #1 Let’s say I’m a hedger and went short on Mar. 2019 corn. $3.74/bushel on Jan. 16 Along with selling a corn futures contract, I have to establish a margin account and deposit $550 in it. On Jan. 17, the Mar. 2019 corn futures price moved to $3.80/bushel. Since I’ll be buying the futures contract later, this price move is not in my favor.

Margin Example #1 I lost 6.0 cents per bushel and since the contract is for 5,000 bushels, that’s a loss of $300. At the end of the day (Jan. 17), my margin account will be tapped for $300, lowering the account balance to $250. Since $250 is less than the “Maintenance” level ($550), I will receive a margin call and be asked to deposit $300 more into the account or to close out the futures position. The $300 brings the account balance back up to the initial requirement.

Margin Example #2 Let’s say, instead of going short, I went long on Mar. 2019 corn. $3.74/bushel on Jan. 16 Along with buying a corn futures contract, I have to establish a margin account and deposit $550 in it. On Jan. 17, the Mar. 2019 corn futures price moved to $3.80/bushel. Since I’ll be selling back the futures contract later, this price move is in my favor.

Margin Example #2 I gained 6.0 cents per bushel and since the contract is for 5,000 bushels, that’s a gain of $300. At the end of the day (Jan. 17), $300 will be added to my margin account, raising the account balance to $850. Since $850 is greater than the “Maintenance” level, I will not receive a margin call.

Margin Example – Going Short (Hedger) Date Price Gain Margin Call Account Balance 1/11/19 $3.8675   $550.00 1/14/19 $3.8700 -$12.50 $12.50 1/15/19 $3.7975 $362.50 $912.50 1/16/19 $3.8225 -$125.00 $787.50 1/17/19 $3.8800 -$287.50 $50.00 1/18/19 $3.9000 -$100.00 $100.00

Margin Example – Going Long (Hedger) Date Price Gain Margin Call Account Balance 1/11/19 $3.8675   $550.00 1/14/19 $3.8700 $12.50 $562.50 1/15/19 $3.7975 -$362.50 $350.00 1/16/19 $3.8225 $125.00 $675.00 1/17/19 $3.8800 $287.50 $962.50 1/18/19 $3.9000 $100.00 $1,062.50

Market Participants Hedgers are willing to make or take physical delivery because they are producers or users of the commodity. Use futures to protect against a price movement. Cash and futures prices are highly correlated. Hold counterbalancing positions in the two markets to manage the risk of price movement.

Hedgers Farmers, livestock producers Merchandisers, elevators Food processors, feed manufacturers Exporters Importers What happens if the futures market is restricted to only hedgers?

Market Participants Speculators have no use for the physical commodity. They buy or sell in an attempt to profit from price movements. Add liquidity to the market. May be part of the general public, professional traders or investment managers. Short-term – “day traders”. Long-term – buy or sell and hold.

Market Participants Brokers exercise trade for traders and are paid a flat fee called a commission. Futures are a “zero sum game” Losers pay winners Brokers always get paid commission

Hedging Holding equal and opposite positions in the cash and futures markets. The substitution of a futures contract for a later cash-market transaction. Who can hedge? Farmers, merchandisers, elevators, processors, exporter/importers

Cash vs. Futures Prices Iowa Corn in 2018 The gap between the lines is the basis.

Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2019/index.htm