Economics 235 Introduction to Agricultural Marketing John D. Lawrence Spring 2008

Course Overview An overview of agricultural and food markets and marketing systems and how these are evolving in a rapidly changing global market place.

Course Topics Overview of food chain structure and coordination - inputs through retail food Wholesale and retail marketing activities, processing, transportation, margins

Course Topics Farm-level price behavior, pricing systems, and marketing management Price analysis, futures, options, contracts, and cooperatives The role of government in agricultural markets

Course Objectives Understand practical marketing problems and issues affecting: The “bottom line” of a business! How the system operates and how well! Resource allocation and efficiency! Use principles to evaluate current events Ask and answer, “So what?”

Course Procedures Discussion/ lecture combination. Read or complete the assignments before coming to class. Apply principles in analyzing new marketing issues or problems.

Resource Materials Class notes Reading assignments on web Basic text for the course: The Agricultural Marketing System Guest speakers occasionally No cell phones!!!!!

One Required Lab Market simulation One evening 6-9 pm Two nights to choose from Tentatively late February

Class Web Site classes/235 faculty/lawrence/ Notes posted Presentations can be downloaded and printed Resource materials and links Secrets are in the lectures!!!

Contacting Instructor John Lawrence 468 Heady Hall, Office hours: by appointment Juan Murguia

Grading Two mid-term tests 40% Final exam 20% Homework, quizzes, project and class participation40%

Grading Procedures Homework due in class on assigned date 10% per day late penalty Test and quizzes will be announced in class If you know you will be gone make arrangements ahead of time

Class Project Team project Farm level analysis Marketing plan Contract evaluation Strategic decision

Weekly Market Report Pick a commodity to follow all semester Corn, Soybeans, Cattle, Hogs Weekly summary due each Tuesday Less than one page Price change Margin account Market news 10 points per week possible

Definition A market is an arena for organizing and facilitation business activities. Define a market FormWhat PlaceWhere TimeWhen

Cash or Spot Market When: Immediate or near-term delivery What: Commodities Defined by minimum standards Often set by USDA Where: Typically at buyer’s location Elevator, processor, auction

Cash or Spot Market Examples #2 yellow corn, Heartland Coop at Nevada, January 4, 2008, farmer to first handler. #1 yellow soybeans, north central Iowa elevators, January 4, 2008, farmer to first handler. Fed cattle 65-80% Choice, Nebraska feedlots, January 7, 2008, feedlot to packer Iowa-S. Minnesota 51-52% Lean hogs, plant delivered, January 7, 2008, farmer to packer. Medium-Large Frame steers pounds, Dunlap Iowa Auction, January 3, 2008, cowherds to feedlots.

Futures markets Today’s price for products to be delivered in the future. A mechanism of trading promises of future commodity deliveries among traders. Biological nature of ag production Prices not known when production decision is made Processors need year around supply

Futures Market Exchanges 12 organized exchanges Two largest Chicago Board of Trade (CBOT) Grains, interest rates Chicago Mercantile Exchange (CME) Livestock, financial, currencies Combined for 75% of futures volume

Semester long assignment Choose and follow a commodity each week throughout the semester. Due each Tuesday Report the price, price change and calculate your margin account based on Friday’s close. Brief (less than one page) analysis of factors that impacted the market the previous Monday – Friday

Sources for information Links also on class web site Cash Futures Right-side menu “VIEW ALL DELAYED QUOTES” Then left-side menu “CME Commodities” Right-side menu Analysis January 4 th, 2008 issue has several suggestions for information

Due Tuesday Jan 22 Pick a commodity Define the cash market and report the price. Find and report the futures price for the same commodity for Friday. Choose a contract month that expires after the end of the class. July or later for corn, wheat, or soybeans June or later for cattle, feeder cattle and hogs

Futures Market Exchanges Trading pits Centralized pricing Buyers and sellers represented All information represented Perfectly competitive market Open out-cry trading

The futures contract A legally binding contract to make or take delivery of the commodity Form (wt, grade, specifications) Time (delivery date) Place (delivery location) Possession (seller delivers, buyer receives)

The futures contract Standardized contract No physical exchange takes place when the contract is traded. Deliveries are made when the contract expires (delivery time) Payment is based on the price established when the contract was initially traded.

Standardized contract Certain delivery (contract) months Fixed size of contract Grains 5,000 bushels Livestock in pounds Lean Hogs 40,000 lbs carcass Live Cattle 40,000 lbs live Feeder Cattle 50,000 lbs live Specified delivery points Relatively few delivery points

Market position Objective: Buy low, sell high You can either buy or sell initially Sell a December Corn contract initially Deliver corn in December OR, Buy back at a later date Buy a February Live Cattle contract initially Take delivery of cattle in February OR, Sell back at a later date

Margin account Highly leveraged trades Margin is the earnest money that must be maintained in the trader’s account Often 5-10% of full value Margin account settled everyday Must maintain account balance Margin call Calculate as if you had to get out of the market every day.

Margin Account Example Corn Contract 5,000 $2.80 = $14,000 Margin = $500 Cattle contract 40,000 $.70 = $28,000 Margin $1,000

Margin Account Initial margin: The amount needed to open and account. Maintenance margin: The minimum amount needed to keep and account open. “Mark to the Market” at the close of each trading day.

Margin Account Example Initial margin$1,000 Maintenance margin$800 Corn contract (5000 bushels) Day 1:Sell at 4.55

Margin Account Example DayPriceChgG/LMargin Below Maintenance Margin. Must make $300 margin call to restore to initial margin Changes reflect the initial “sell” of the contract