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

Carry (or Spread) The price difference between futures contracts Compare the carry offered by the market to the costs of storing grain from one delivery month to the next.

Corn Futures Carry July $4.26 May $4.20 Mar $4.13 Dec $4.02 Date: 4/10/15

Soybean Futures Carry July $9.62 May $9.56 Mar $9.53 Jan $9.48 Date: 4/10/15 July $9.62 May $9.56 Mar $9.53 Jan $9.48 4

Corn Futures Carry May $6.58 July $6.34 May $6.30 July $6.53 Date: 11/17/11 Date: 4/3/12 May $6.58 July $6.34 May $6.30 July $6.53

Inverse Carry When further out futures are priced at a discount to nearby futures Usually occurs when demand is strong and the need for the crop is immediate Can also occur during short crop situations or when there is a large crop coming in after a tight stock situation Basis is usually stronger in an inverse market

Corn Futures Carry Date: 4/12/13 May $6.58 July $6.41 Sept $5.77

Soybean Futures Carry Date: 4/12/13 May $14.13 July $13.79 Aug $13.39

Cost of Ownership Carry shows the additional revenue that can be obtained from holding on to the crop But there are costs to holding on: storage interest/opportunity costs These are known as the cost of ownership If the carry more than covers the cost of ownership, then it’s referred to as “full carry”

Storage Typically, storage costs can be broken down into two categories An in-out charge: sort of like a flat upfront fee Periodic charge: the additional cost for each time period - Could be monthly, weekly, or daily Charges vary by location (on-farm vs. off-farm)

Interest/Opportunity Costs Costs associated with the lost opportunities you could have had if you sold the grain at harvest and reinvested the proceeds Figured as: Cash price at harvest * Short term interest rate * Months in storage / 12 Or the opportunity cost for each month in storage is: (1/12)* Cash price at harvest * Interest rate

Corn Cost of Ownership Assumption: Corn is Valued at $3.50/bu Financed @ 5% APR

Soybean Cost of Ownership Assumption: Soybeans are Valued at $9.00/bu Financed @ 5% APR

Other Factors Moisture levels and drying costs Shrink factor Transportation costs Quality issues Helpful tool to evaluate costs: http://www.extension.iastate.edu/agdm/crops/xls/a2-33.xls

Seasonal Pricing Patterns Source: USDA, NASS, Monthly Price Data 1980-2013

Iowa Storage Capacity Source: USDA-NASS 16 16

U.S. Storage Capacity Source: USDA-NASS 17 17

Storage Issues Source: Hurburgh and Elmore, ICM News, 10/15/09 18 18

Class web site: Lab in Heady 68. http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2015/ Lab in Heady 68.