1. Crop Marketing Hancock County Grain Marketing Garner, Iowa
Feb. 6, 2017
Chad Hart
Associate Professor/Crop Markets Specialist 1 1

2. 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 2 2

3. Cash Markets A market where physical commodities are traded
Local elevators
Ethanol plants & soybean crushers
River terminals
Feeders/feed mills 3 3

4. Futures Markets
A market where contracts for physical commodities are traded, the contracts set the terms of quantity, quality, and delivery
Chicago: Corn, soybeans, cattle, hogs
Along with wheat (soft red), oats, rice
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 4 4

5. The Cash and Futures Markets Are Related
Basis = Cash price – Futures price Rearranging terms: Cash price = Futures price + Basis So national (and international) events can affect local prices

6. Cash vs. Futures Prices Iowa Corn in 2016
The gap between the lines is the basis.

7. 2016 Basis for Iowa Corn

8. Agricultural Markets
Has some unique features due to the nature of agricultural businesses
Supply comes online a few times during the year
So at harvest, supply spikes, then diminishes until the next harvest
Production decisions are based price forecasts
Planting decisions can be made a full year (or more) before the crop price is realized
Users provide year-round demand
Livestock feeding, biofuel production, food demand 8 8

9. Cash Contracts
When we talk about a cash contract, it is an agreement between a seller and a buyer covering a quantity and quality of a product to be delivered at a specified location and time for a specific price
If the time is now, we call it a “cash” contract
If the time is sometime in the future, then it’s a “forward cash” contract

10. The Highest Cash Price Is …
… Not always the highest return
Need to think about transportation and storage costs
Compare the cash prices we’ve seen today:
If storage is costing me 3 cents/bushel/month, do the May bids look better than the current cash price?
If transportation is costing me 0.5 cents/bushel/mile, which is the better price?
Forest City (13 miles) Kiester, MN (35 miles)
Albert Lea, MN (49 miles) Clear Lake (12 miles)

11. Cash vs. Futures Hedge Cash Sales Futures Hedge
Locks in full price and delivery terms
No margin requirements
Futures Hedge
Locks in futures price, but leaves basis open
Could see price improvement/loss
Can be easily offset if problems arise

12. Average Iowa Corn Basis, 2010-14
Source:

13. Seasonal Patterns
A price pattern that repeats itself with some degree of accuracy year after year.
Supply and demand
Often sound reasons
Widely known
Linked to storage cost or basis patterns in grains
Linked to conception and gestation in livestock

14. Seasonal Pricing Patterns
Source: USDA, NASS,
Monthly Price Data

15. Cost of Ownership
Carry shows the additional revenue that can be obtained from holding on to the crop
But there are costs to holding on:
storage
interest/opportunity costs
These are known as the cost of ownership
If the carry more than covers the cost of ownership, then it’s referred to as “full carry”

16. Corn Cost of Ownership
Assumption: Corn is Valued at $3.50/bu 5% APR

17. Carry (or Spread) The price difference between futures contracts
Compare the carry offered by the market to the costs of storing grain from one delivery month to the next.

18. Corn Futures Carry July $4.26 May $4.20 Mar $4.13 Dec $4.02
Date: 4/10/15

19. Corn Futures Carry May $6.58 July $6.34 May $6.30 July $6.53
Date: 11/17/11
Date: 4/3/12
May $6.58
July $6.34
May $6.30
July $6.53

20. Inverse Carry
When further out futures are priced at a discount to nearby futures
Usually occurs when demand is strong and the need for the crop is immediate
Can also occur during short crop situations or when there is a large crop coming in after a tight stock situation
Basis is usually stronger in an inverse market

21. Corn Futures Carry
Date: 4/12/13
May $6.58
July $6.41
Sept $5.77

22. Short Hedgers
Producers with a commodity to sell at some point in the future
Are hurt by a price decline
Sell the futures contract initially
Buy the futures contract (offset) when they sell the physical commodity

23. Short Hedge Expected Price
Futures prices when I place the hedge
+ Expected basis at delivery
– Broker commission

24. Short Hedge Example As of Jan. 20,
($ per bushel)
Nov soybean futures $10.29
Historical basis for Nov. $-0.30
Rough commission on trade $-0.01
Expected price $ 9.98
Come November, the producer is ready to sell soybeans
Prices could be higher or lower
Basis could be narrower or wider than the historical average

25. Prices Went Up, Hist. Basis
In November, buy back futures at $11.50 per bushel
($ per bushel)
Nov soybean futures $11.50
Actual basis for Nov. $-0.30
Local cash price $11.20
Net value from futures $-1.22
($ $ $0.01)
Net price $ 9.98

26. Prices Went Down, Hist. Basis
In November, buy back futures at $7.00 per bushel
($ per bushel)
Nov soybean futures $ 7.00
Actual basis for Nov. $-0.30
Local cash price $ 6.70
Net value from futures $ 3.28
($ $ $0.01)
Net price $ 9.98

27. Short Hedge Graph
Hedging Nov $10.29

28. Prices Went Down, Basis Change
In November, buy back futures at $7.00 per bushel
($ per bushel)
Nov soybean futures $ 7.00
Actual basis for Nov. $-0.10
Local cash price $ 6.90
Net value from futures $ 3.28
($ $ $0.01)
Net price $10.18
Basis narrowed, net price improved

29. Options What are options?
An option is the right, but not the obligation, to buy or sell an item at a predetermined price within a specific time period.
Options on futures are the right to buy or sell a specific futures contract.
Option buyers pay a price (premium) for the rights contained in the option.

30. Option Types Two types of options: Puts and Calls
A put option contains the right to sell a futures contract.
A call option contains the right to buy a futures contract.
Puts and calls are not opposite positions in the same market. They do not offset each other. They are different markets.

31. Options as Price Insurance
The person wanting price protection (the buyer) pays the option premium.
If damage occurs (price moves in the wrong direction), the buyer is reimbursed for damages.
The seller keeps the premium, but must pay for damages.

32. Strike Prices
The predetermined prices for the trade of the futures in the options
They set the level of price insurance
Range of strike prices determined by the futures exchange

33. Setting a Floor Price Short hedger Buy put option
Floor Price = Strike Price + Basis – Premium – Commission
At maturity
If futures < strike, then Net Price = Floor Price
If futures > strike, then Net Price = Cash – Premium – Commission

34. Put Option Graph Dec. 2017 Corn Futures @ $3.9325 Strike Price @ $4.00
Put Option Return =
Max(0, Strike Price – Futures Price) – Premium – Commission
Premium = $0.3425
Commission = $0.01

35. Put Option Graph Dec. 2017 Corn Futures @ $3.9325 Strike Price @ $4.00
Premium = $0.3425
Net = Cash Price + Put Option Return

36. Call Option Graph Dec. 2017 Corn Futures @ $3.9325
Strike $4.00
Call Option Return =
Max(0, Futures Price – Strike Price) – Premium – Commission
Premium = $0.2875
Commission = $0.01

37. Thank you for your time. Any questions. My web site: http://www2. econ
Thank you for your time! Any questions? My web site: Iowa Farm Outlook: Ag Decision Maker: