AGEC 420, Lec 181 AGEC 420 Markets Hedged storage examples Assignment #4 – HedgeSim TradeSim – Wednesday?

AGEC 420, Lec 182 Open Position - MidAm Wheat Fri., Feb 15: Bot 1 MidAm May 2.82; Sell 2.74½ Close $ +/- Fri., Feb ¾ -$2.50 Fri., Feb ¼ +$42.50 Fri., Mar ½ -$35.00 Today ???

AGEC 420, Lec 183 Hedged Storage Decision rule –Store only if and as long as projected basis improvement > storage cost

AGEC 420, Lec 184 Example: Wheat: Aug 1, 1998 Cash price, Salina, $2.60, March futures, $3.15 –Opening basis: -$0.55 –Expected March basis: -$0.18 –Projected improvement: $0.37

AGEC 420, Lec 185 Example (cont.): Cost of carry: (Elevator storage) –Storage costs per month $0.03 –Interest costs per month $0.02 (8% x $2.60 x 1/12) –Total cost per month $0.05 Cost for 7 months$0.35 Decision: Cost < expected basis improvement Expect 2c/bu margin from hedged storage.

AGEC 420, Lec 186 Example (cont.) Wheat: March 1, 1999 Cash bid from elevator, $2.48 March futures, $2.61 Closing basis is -$0.13

AGEC 420, Lec 187 Calculate Profit Basis strengthened by $0.42 (from -$0.55 to -$0.13) Cost of storage was $0.35 Profit = $0.07c/bu

AGEC 420, Lec 188 Calculate Profit Cash buy in 2.60; sell in 2.48 loss of 12c/bu Futures sell in 3.15 ; buy in 2.61 profit of 54c/bu Cash/Futures profit of 42c/bu Less storage cost of 35c/bu

AGEC 420, Lec 189 Notes Store only if and as long as projected basis improvement > storage cost Hedged storage depicts a situation where one is said to be “long-the-basis” –typical situation for an elevator

AGEC 420, Lec 1810 Grain Marketing Workshop White Commercial –Thursday April 4, 5pm-9pm, –Waters Hall 328

AGEC 420, Lec 1811 St. Francis Basis

AGEC 420, Lec 1812 Expected St. Francis Basis in Mid-March CashKC FuturesBasis

AGEC 420, Lec 1813 Decision rule Store only if and as long as projected basis improvement > storage cost

AGEC 420, Lec 1814 Example – St. Francis Wheat: Aug 1, 1999 Cash price, St.Francis, $2.25, March futures, $3.25 –Opening basis: -$1.00 –Expected March 1 basis: -$0.50 ?? –Projected improvement: $0.50 ??

AGEC 420, Lec 1815 Example (cont.): Cost of carry: –Storage costs per month $0.04 –interest costs per month $0.02 (10% x $2.25 x 1/12) –Total cost per month $0.06 Cost for 7 months$0.42 Decision: Store and hedge by selling March futures Expected profit: $ $0.42 = 8c/bu

AGEC 420, Lec 1816 Example (cont.) December 1, 1999 Cash price, St. Francis, $2.10 March futures, $2.70 Basis is -$0.60 Continue with hedged storage ??

AGEC 420, Lec 1817 Re-evaluate on December 1 Basis Exp. Basis, March Expected basis strengthening between Dec. 1 and March 1 is 10 cents. Cost of storage: Dec 1 to March 1 (3 6c/mo = 18 cents) Decision? Sell grain now and lift hedge.

AGEC 420, Lec 1818 Calculate Profit Cash Buy (own) on Aug 2.25; Sell on Dec 2.10  Loss of 15c/bu on cash Futures Sell on Aug 3.25; Buy on Dec 2.70  Profit of 55c/bu on futures Storage cost 4 6c/mo = 24c Profit: $ $ $0.24 = 16c/bu

AGEC 420, Lec 1819 Storage hedge Profit = basis improvement – storage cost Store only if and as long as projected basis improvement > storage cost