1. Econ 338C, Spring 2009 ECON 338C: Topics in Grain Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

2. Econ 338C, Spring 2009 Marketing A series of events and services to create, modify, and transport a product from initial creation to consumption Possible steps:  Planning  Production  Inspection  Transport  Storage  Processing  Sale Market players:  Producers  Elevators  Processors  Transport companies  Banks/Insurance companies  Traders  Feeders

3. Econ 338C, Spring 2009 Market Functions  Location  Time  Form  Price discovery Where do you want it? When do you want it? How do you want it? What will you pay for it?

4. Econ 338C, Spring 2009 Price Determination and Discovery Price Determination –is the broad forces of supply and demand establishing a market clearing price for a commodity. Price Discovery –is the process by which buyers and sellers arrive at a specific price for a given lot of produce at a given location for a specific time period.

5. Econ 338C, Spring 2009 Price Determination and Price Discovery S D P Q PePe QeQe

6. Econ 338C, Spring 2009 Price Discovery A human process, subject to relative bargaining power of the buyer and seller. Two stage process –Evaluate supply & demand –Estimate the price for the specific trade

7. Econ 338C, Spring 2009 Cash Markets  Local elevators  Ethanol plants & soybean crushers  River terminals  Feeders/feed mills A market where physical commodities are traded

8. Econ 338C, Spring 2009 Futures Markets  Chicago: Corn, soybeans, wheat (soft red), oats, rice  Along with the livestock complex  Kansas City: Wheat (hard red winter)  Minneapolis: Wheat (hard red spring)  Tokyo: Corn, soybeans, coffee, sugar  Has a market for Non-GMO soybeans  Other markets in Argentina, Brazil, China, and Europe A market where contracts for physical commodities are traded, the contracts set the terms of quantity, quality, and delivery

9. Econ 338C, Spring 2009 Market Activities  Pricing the commodity  Establishing contracts  Merchandising the commodity among uses  Transporting the products  Storing the products  Managing and controlling the products  Managing production and price risks

10. Econ 338C, Spring 2009 Soybean Crush Prices based on July futures, 3/11/09

11. Econ 338C, Spring 2009 U.S. Corn Supply and Use Source: USDA 200720082009 Area Planted(mil. acres)93.586.0 Yield(bu./acre)150.7153.9156.9 Production(mil. bu.)13,03812,10112,365 Beg. Stocks(mil. bu.)1,3041,6241,790 Imports(mil. bu.)2015 Total Supply(mil. bu.)14,36213,74014,170 Feed & Residual(mil. bu.)5,9385,3005,200 Ethanol(mil. bu.)3,0263,7004,100 Food, Seed, & Other(mil. bu.)1,3371,300 Exports(mil. bu.)2,4361,7001,850 Total Use(mil. bu.)12,73712,00012,450 Ending Stocks(mil. bu.)1,6241,7401,720 Season-Average Price($/bu.)4.204.103.60

12. Econ 338C, Spring 2009 U.S. Soybean Supply and Use Source: USDA 200720082009 Area Planted(mil. acres)64.775.777.0 Yield(bu./acre)41.739.642.6 Production(mil. bu.)2,6772,9593,240 Beg. Stocks(mil. bu.)574205210 Imports(mil. bu.)1093 Total Supply(mil. bu.)3,2613,1733,453 Crush(mil. bu.)1,8011,6401,675 Seed & Residual(mil. bu.)93163172 Exports(mil. bu.)1,1611,1851,225 Total Use(mil. bu.)3,0562,9883,073 Ending Stocks(mil. bu.)205185380 Season-Average Price($/bu.)10.109.358.00

13. Econ 338C, Spring 2009 Outside Influences (Jan. 2007 = 1)

14. Econ 338C, Spring 2009 Outside Influences (Sept. 2008 = 1)

15. Econ 338C, Spring 2009 Ethanol Margins Source: ISU, CARD

16. Econ 338C, Spring 2009 Renewable Fuels Standard (RFS)

17. Econ 338C, Spring 2009 Harvest Futures Source: CBOT

18. Econ 338C, Spring 2009 Input Costs Source: USDA, Agricultural Prices, Feb. 2009

19. Econ 338C, Spring 2009 Iowa Corn Prices vs. Costs Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

20. Econ 338C, Spring 2009 Estimates for 2009 Iowa Costs Non-land Cost Land Cost Total Cost Expected Yield Cost per Bushel ($/acre)(bu/acre)($/bu) Corn 486.61205.00691.611604.32 Soybean 285.60205.00490.60509.81 December 2009 Corn Futures = $3.96 (3/11/09) November 2009 Soy Futures = $8.17 (3/11/09) Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

21. Econ 338C, Spring 2009 Estimated 2009 Iowa Corn Costs Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

22. Econ 338C, Spring 2009 Estimated 2009 Iowa Corn Costs Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

23. Econ 338C, Spring 2009 Estimated 2009 Iowa Corn Costs Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf Short run, need to cover cash flow costs Seed, fertilizer, chemicals, rent, insurance, etc. Cash flow costs vary by structure Cash renter, Share renter, Owner Farmer choices: Fertilizer, crop insurance

24. Econ 338C, Spring 2009 Seasonal Pricing Patterns Source: USDA, NASS, Monthly Price Data 1980-2008

25. Econ 338C, Spring 2009 A Few Definitions and Relationships Spread is the difference between futures prices Basis = Cash price – Futures price Rearranging terms: Cash price = Futures price + Basis

26. Econ 338C, Spring 2009 Corn Futures Source: CBOT, 3/10/09 Spread = 18.75 cents Spread indicates the market’s willingness to pay for storage

27. Econ 338C, Spring 2009 Soybean Futures Source: CBOT, 3/10/09 Spread = -23.5 cents What is the signal the market is sending? This is called an inverted market.

28. Econ 338C, Spring 2009 Historical Basis for Iowa Factors that affect basis: Transportation costs Storage and interest costs Local supply and demand

29. Econ 338C, Spring 2009 Basis

30. Econ 338C, Spring 2009

33. Class web site: http://www.econ.iastate.edu/classes/econ338C/Hart/ Have a great Spring Break! http://www.econ.iastate.edu/classes/econ338C/Hart/