1. Risk: How Much Can You Handle?
Does it Pay to Improve Your Marketing

2. Marketing ~ The Basics

3. Price
Yield x
- Expenses
Profit

4. Price Probability

5. Selling Curve for Farmers.
Selling Curve for Farmers
Better than 60% of all corn and soybeans sold by farmers is sold in the bottom 1/3 of the price range
Less than 10% of all corn and soybeans sold by farmers is sold in the upper 1/3 of the price range

6. futures contract & Trading

7. What Is A Futures Contract?
Grains (corn, oats, wheat) bu. contract
March, May, July, September, December
Soybeans bu. contract
January, March, May, July, August, September, November

8. Market Quotes ~ Grains

9. How Trading is done In Pits Hand signals Bids & Offers Cried Out
Prices Reported
Trades Reported to Clearing House

10. You receive news that makes you think corn prices will move lower
“Sell 5,000 Bu.
Dec. corn at the market”
“You sold 5,000 Bu.
Dec. Corn at $2.67
Local broker calls you
Local Broker receives order
Sends to clearing firm desk
Desk informs local broker
Transaction put on Computer
Runner takes order to pit
Runner reports to desk
Transaction made in pit

11. basis

12. Basis
The difference between the local cash market and the futures contract at a specific month
The difference is due mainly to:
Cost to deliver
Cost to store
Interest cost of commodity over time

13. Elevator Basis: Basis b/w local elevator & futures contract
Local conditions affect basis
Generally, in past, not as large as normal basis ($0.50). We seem to be in a new era with basis.
Must chart elevator basis in order to use effectively
Using this basis causes some risk - due to conditions in a certain year, basis may be wider than charted and calculated

16. Basis Conditions Narrow Basis - basis is less than normal basis
Usually in short crop years
signal to sell--no incentive to store
sell cash, buy futures good alternative or buy a call
Wide Basis - basis is more than normal basis
Usually in large crop years
Market encourages you to store
Hedging is good marketing alternative
Inverted Basis - Futures less than local mkt.

17. Basis Signals
If you like the price and the basis, sell cash or make a cash forward sale
If you like the price but not the basis, sell futures, use hedge to arrive or buy a put option
If you like the basis but not the price, lock in the basis with a basis fixing contract
If you don’t like the basis or the price, wait

19. Grain storage & Hedging

20. What does it cost to store grain?
Interest on Commodity
Energy cost to keep grain in condition
Shrink
Crop going out of condition
Cost to maintain the bin
Commercial Storage = 3 cents/mo.
On Farm Storage = 1.5 to 2 cents/mo.

21. Things you need to know for a Storage Hedge
Basis (Cash Price – Futures Price at a specific futures month)
Want wide basis in & narrow basis out
Know your normal basis
You must own the commodity
Usually need 10% margin money

22. Basis Cash Net Hedging Example Futures -$1.00 Local Price = $2.50
$3.50 Sell Futures
-$0.50
Sell Local $2.20
$2.70 Buy Futures
Basis Gain +$0.50
Local Sale -$0.30
+$0.80 Futures
Net
+$0.50

23. What price did I receive?
Sold my crop to the local elevator for $2.20
Received profit from the futures contract $0.80
Priced received for grain $3.00

24. Hedge to Arrive Contract
Contract with local elevator to hedge your grain through them at a fee, usually cost/bu.
The elevator makes the margin call
Do Not have to hedge in 5000 bu. amount
Must sell to elevator you have contract with.
Gives you market flexibility of hedge.

25. Hedge-To-Arrive Advantages
Cost of hedge is known
Do not need line of credit to meet margin call
Be sure contract does not include clauses for margin call
Do not need to know about futures trading
Do not tie up capital in margin account
Not restrained by contract size
You can choose when to lock in Basis

26. Options Marketing – What Is It?
The Buyer of an option (farmer) acquires the right, but not the obligation, to buy or sell an underlying commodity in the future’s market in exchange for payment of a premium
Right to buy or sell a futures contract
In other words, the option (not the obligation) to go short or long in the mkt
I don’t have to if don’t want to – can expire
I pay a premium for the privilege to cancel

27. Options marketing

28. Options – The Purpose Protects you from a price drop or increase
Put a Floor or Ceiling on price
Price increase/decrease (depending on future’s position) will not work against you (unlike future’s market) – just don’t exercise
May be considered an insurance against price drop or increase
The insurance Company—The options seller, insures a price for your grain
The Seller receives a premium for taking on your risk. You have limited your risk to the premium.

29. Options Marketing
Basically like putting Earnest Money down on a house you want to buy
If you put the money down & buy – these funds go towards the house purchase price
If you put the money down & back out – these dollars are lost (the sellers get to keep it)
Expires? On the 20th of the month before the future’s contract month.

30. Puts The right to sell a futures contract (go short)
Protects from price decline – sets floor
If option is exercised, you own a short position futures contract
Brokerage fee, margin acct, & now hedged
Lock in a price bottom, but still get increased price if the market rises
Put premium value declines to zero as the market rises. Increases as the market falls. Your strike price is then above the market price. (Sell High)

31. Call The right to buy a futures contract (go long)
Protection from price rise – sets ceiling
If option is exercised, you own a long position futures contract
Lock in a price but still get decreased price if the market falls
Call premium value increases as the market rises. (Your strike price is below the market – buy low). Decreases to zero as market falls.

32. Strike Price Price at which an option is exercised
Price you’re insuring – guaranteed price
Premium is based off Strike Price’s relationship to the Futures Market Price of the day
Based on:
Intrinsic Value – always positive value; money that could be realized now by exercising the option with given strike price
Time Value – time before expiration, market volatility, & interest rates

33. In the Money, At the Money, Out of the Money
Relationship of Futures contract to strike price.
In the money —exercising would result in profit from the futures transaction.
Call’s strike is below the futures
Put’s strike is above the futures
At the money —futures price and strike price are the same or nearly the same
Out of the money —no profit from exercising
Only time value in the premium

34. Your Rights As An Option Owner
First Let Option expire worthless
No follow-up needed
Sell Back
Cash in premium value
Exercise
Take short position in the futures (if put)
Offset contract when you sell grain
If speculating, offset contract when you have reached your price goal
Now Hedged
Gives a whole layer of trading beyond future’s

35. Analyzing the market

36. Factors Affecting Price Movement
There are 2 Factors in the Market Affecting Price:
Fundamentals – supply & demand; what farmers talk about most
Technicals – charting and watching market movements
** Eventually the Fundamentals win **

37. Fundamental Analysis – The Laws of Economics
When prices go up, what happens?
Increased production
Decreased consumption
When prices get lower, what happens?
Decrease production
Increased consumption
Fundamentals used as a 1 year look ahead
Use fundamentals to establish price odds & pricing goals

38. Fundamental Analysis Factors
Weather ** Key Factor
Gold—Metals
Transportation
Dock Strikes, Trucker Strikes
USDA Reports
Disease
Exports—Imports
Actions of other Countries
Government Programs
Reserves
Embargos
Domestic Use
Interest Rates
Value of the Dollar
Inflation

39. Technical Analysis Charting what is happening in the market
Used for short term strategy
More what the speculators and funds buyers use
Do I sell today or wait for tomorrow?
Bar Charts help you spot tops and bottoms
Ex: Key Reversals—have 86% reliability record in soybeans

40. Cycles and Seasonals
You need to be alert enough to market trends to know what is not typical
Harvest low
After Harvest Recovery – Dec/Jan
Winter Blahs – steady in Feb/March
Summer Recovery – up from April through July
Down to Harvest
“The Trend is Your Friend”
Do opposite of everyone else – probably right!?!?
Successful people do what others don’t want to

41. Developing a market plan

42. Marketing Plan Factors – Pulling It Together
Personal Feelings and Attitudes
What type of a marketer are you?
Speculator
Businessperson
Financial Needs of the Business
Cost of production
Cash flow needs
Seasonal Patterns/Price Trends
Price Outlook—Market Information
Know the tools you have to use

43. What is the basic information you need to develop a marketing plan?
Determine the amounts of grain to sell
Determine the marketing tools you want to use
The more tools in your tool box, the more likely you are to reach your marketing goal
Determine when to sell
May have a price in mind, but remember a time deadline too
Form a realistic price goal
Farther you are away from marketing the grain, the higher the price should be

44. Corn Prices –
Normal Seasonal Pattern

45. Soybean Prices –
Normal Seasonal Pattern

46. PRICING DEADLINES March 31 for pre-plant season
Planting intentions report
June 30 for growing season
Crop size generally known
** As soon unknowns are knowns the market tends to drop – Uncertainty = Volatility in the market
Same dates apply for stored crop--all sold by June 30
YOU MUST SELL BY YOUR DEADLINE – PLANS DON’T WORK WITHOUT DATES

47. Picking the Proper Marketing Tool