1. Understanding Agricultural Futures
John Hobert
Farm Business Management Program
Riverland Community College

2. Chicago Board of Trade General Information Series:
Introduction to Futures and Options
Agricultural Futures for the Beginner
Agricultural Options for the Beginner
Buyers Guide to Managing Price Risk
Cash Fundamentals
What’s in a Price?
Understanding Basis

3. Chicago Board of Trade General Information Series Continued:
Weather Markets
Weather and the Corn Market
Weather and the Soybean Market
Weather and the Wheat Market

4. Exploring the World of Ag Futures:
The Chicago Board of Trade opened in 1848.
CBT is the world’s leading futures exchange
CBT offers a medium for businesses to offset risks of producing food and maintain price stability.

5. The Market Participants:
Hedgers
Speculators

6. Hedgers: Farmers Country Elevator Operators Processors Exporters
Importers

7. Speculators:
General Public
Floor Traders

8. What Exactly are These Contracts Called Futures:
“They are legally binding agreements, made through a futures exchange, to buy or sell commodities in the future.”
“They are standardized in every way with the exception of price.”
“They can protect individuals against dangerous price swings.”

9. What Exactly are These Contracts Called Futures:
“A futures contract is a firm commitment to deliver or to receive specified quantities and grades of a commodity during a designated month with price being determined by public auction(“outcry”) in the pit.”

10. Using Futures Contracts to Help Your Business:
To price stored grains.
To price growing crops.
To price feed grains.
To gain market information.
To speculate on $Price Change.
To plan marketing programs.

11. Elements of a Futures Contract:
Quality
Grade
Price
Delivery Point
Time of Delivery

12. Settlement of Futures Contracts:
Offsetting your position in the futures market.
Short Position: Go Long
Long Position: Go Short
Delivering your Commodity to the delivery point and meeting the other qualifications of the futures contract.

13. The Costs of Futures Contracts:
Commission fees for placing the contract.
Basis change against your market position.
Initial Margin money.
Margin Calls to keep Margin at maintenance levels.
Interest.
Storage.

14. Typical Margin Requirements:

15. Typical Commission Fees:

16. Carry or Carrying Charges:

17. Futures Market Jargon:
Basis: The spread between cash and futures markets.
Bull: An individual who thinks prices will rise.
Bear: An individual who thinks prices will decline.

18. More Futures Market Jargon:
Cash Market: A place where actual commodities are bought and sold.
Futures Market: A market where traders buy and sell futures contracts.
Long: Buyer of futures contract.
Short: Seller of futures contract.

19. Future Contract Months Vary with Grain:

20. Futures Contract Quantities Vary with Produce:

21. What determines Basis?
It reflects transportation costs between your local market and the futures delivery point specified by the futures contract.
It reflects the storage and handling costs until the delivery month of the futures contract.
It reflects local supply and demand factors.

22. Calculating Basis:
A lower cash market(Spot) price minus a higher futures market price in a given contract month results in an “under” basis.
i.e minus 2.70 = basis of .30 under
A higher cash market(Spot) price minus a lower futures market price in a given contract month results in an “over” basis.
i.e minus 2.40 = basis of .30 over

23. The Long Hedge: (Buying)

24. Long Hedge Example Result:
Purchase price of Corn= $3.40
Less futures gain =
Net Purchase Price = $2.90
In this example, the farmer protected his corn purchase price by purchasing and selling a CBOT September Corn Contract.

25. The Short Hedge: (Selling)

26. Short Hedge Example Result:
Sale Price of Cash Corn = $1.90
Plus Futures Gain =
Net Sale Price = $2.60
In this example, the farmer protected his corn sale price by selling and purchasing a CBOT December Corn Futures Contract.

27. Corn Futures Problem 1:

28. Corn Futures Problem 1 Result:
Sale Price of Cash Corn = $2.19
Plus Futures Gain =
Net Sale Price = $2.59
In this example, the Farmer protected his stored grain by selling and purchasing a CBOT July Corn Futures Contract.

29. How Predictable is the Futures Market?
“The Futures Market does not always move as you might anticipate, but a hedger’s primary objective is to achieve price protection.”

30. Soybean Futures Problem 2:

31. Soybean Futures Problem 2 Result:
Sale Price of Cash Corn = $6.35
Plus Futures Gain =
Net Sale Price = $6.70
In this example, the Farmer protected his purchase position by purchasing and selling a CBOT November Soybean Futures Contract.

32. Soybean Futures Problem 3:

33. Soybean Futures Problem 3 Result:
Sale Price of Cash Corn = $7.00
Less Futures Gain =
Net Sale Price = $6.70
In this example, the Farmer protected his purchase position by selling and purchasing a CBOT November Soybean Futures Contract.