1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
Chad Hart
Associate Professor 1

2. Margin Accounts
A margin account is an account that traders maintain in the market to ensure contract performance. There are minimum limits on the size of the account.
Crop Trader Type Initial Maintenance
Corn Hedger/Speculator $1,100 $1,000
Soybeans Hedger/Speculator $2,310 $2,100
Lean Hogs Hedger/Speculator $1,320 $1,200
Live Cattle Hedger/Speculator $1,980 $1,800
To trade, you must create a margin account with at least the “Initial” amount and maintain at least the “Maintenance” amount in the account at the end of each trading day.

3. Margin Calls Margin accounts are rebalanced each day
Depending on the value of futures
Settlement price
If your futures are losing value, money is taken out of the margin account to cover the loss
If the account value falls below the “Maintenance” level, you receive a margin call (a call to put additional money in your margin account) and the balance is brought back up to the Initial amount

4. Margin Example Let’s say I went short on Mar. 2016 corn
$3.5175/bushel on Jan. 11
Along with selling a corn futures contract, I have to establish a margin account and deposit $1,100 in it
On Jan. 15, the Mar corn futures price moved to $3.6325/bushel
Since I’ll be buying the futures contract later, this price move is not in my favor

5. Margin Example
I lost 11.5 cents per bushel and since the contract is for 5,000 bushels, that’s a loss of $575
At the end of the day (Jan. 15), my margin account will be tapped for $575, lowering the account balance to $625
Since $625 is less than the “Maintenance” level ($1,000), I will receive a margin call and be asked to deposit $575 more into the account or to close out the futures position
The $575 brings the account balance back up to the initial requirement

6. Margin Example #2
Let’s say, instead of going short, I went long on May 2016 corn
$3.575/bushel on Jan. 11
Along with buying a corn futures contract, I have to establish a margin account and deposit $1,100 in it
On Jan. 15, the May 2015 corn futures price moved to $3.675/bushel
Since I’ll be selling back the futures contract later, this price move is in my favor

7. Margin Example #2
I gained 10 cents per bushel and since the contract is for 5,000 bushels, that’s a gain of $500
At the end of the day (Jan. 15), $500 will be added to my margin account, raising the account balance to $1,600
Since $1,600 is greater than the “Maintenance” level, I will not receive a margin call

8. Margin Example – Going Short
Date
Price
Gain
Margin Call
Account Balance
1/08/16
$3.6275
$1,100
1/11/16
$3.575
+$262.50
$1,362.50
1/12/16
$3.6225
-$237.50
$1,125
1/13/16
$3.63
-$37.50
$1,087.50
1/14/16
+$12.50
1/15/16
$3.675
+$237.50

9. Margin Example – Going Long
Date
Price
Gain
Margin Call
Account Balance
1/08/16
$3.6275
$1,100
1/11/16
$3.575
-$262.50
1/12/16
$3.6225
+$237.50
$1,337.50
1/13/16
$3.63
+$37.50
$1,375
1/14/16
-$12.50
$1,362.50
1/15/16
$3.675
$1,125

10. Market Participants
Hedgers are willing to make or take physical delivery because they are producers or users of the commodity
Use futures to protect against a price movement
Cash and futures prices are highly correlated
Hold counterbalancing positions in the two markets to manage the risk of price movement

11. Hedgers Farmers, livestock producers Merchandisers, elevators
Food processors, feed manufacturers
Exporters
Importers
What happens if the futures market is restricted to only hedgers?

12. Market Participants Speculators have no use for the physical commodity
They buy or sell in an attempt to profit from price movements
Add liquidity to the market
May be part of the general public, professional traders or investment managers
Short-term – “day traders”
Long-term – buy or sell and hold

13. Market Participants
Brokers exercise trade for traders and are paid a flat fee called a commission
Futures are a “zero sum game”
Losers pay winners
Brokers always get paid commission

14. Hedging
Holding equal and opposite positions in the cash and futures markets
The substitution of a futures contract for a later cash-market transaction
Who can hedge?
Farmers, merchandisers, elevators, processors, exporter/importers

15. Cash vs. Futures Prices
Iowa Corn in 2015

16. Class web site: See you at lab, Heady 68!
See you at lab, Heady 68!