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Published bySummer Knill Modified over 10 years ago
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Commodity Marketing (futures) Mathematical Applications in Agriculture
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Agribusiness Producers Early Agriculturalists sold commodities at market price at the time of selling. – Today, production agriculturalists use current production, capital, and labor strategies to make prices. – Forward Contracts- A cash contract in which a seller agrees to a price for a specific commodity sometime in the future. – Commodity- A transportable resource product with commercial value.
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Commodity Markets Originated in Chicago in the 1800s to help producers reduce price risk. – Standards developed Beef Grading Standards – Commercial – Select – Choice – Avg. Choice – High Choice – Prime – Bushels per acre/ 56 lbs.
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Commodity Markets 1848- Establishment of the Chicago Board of Trade. Created a centralized marketplace to exchange commodities between buyers and sellers. 1865- CBOT created futures contracts. Futures Contracts- To buy or sell a commodity in the future. A futures contract specifies quantity, quality, time and price.
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Margining Systems To prevent problems of not fulfilling contracts, margining systems were initiated. Margining systems required the seller to deposit funds to guarantee the product they were selling.
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Exchanges do not trade physically Prices are negotiated not actually physical product being traded. – Contract specifies certain month that product will be delivered.
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What does a contract look like? Contract Specifications Name of Commodity: Corn Where is it traded: Chicago Board of Trade Contract Months: March, April, May, June, July Contract Size: 5,000 bu. Price per bushel in 14 bushel increments.
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Determining Value of Futures Contract To figure value of commodity: value = settlement price x contract size Minimum price fluctuations- The smallest price at which a futures contract trades.
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Determining Profit on Futures Contract Example: Jul. 1 BUY Dec. Corn futures at $2.50/bu. Jul. 30 SELL Dec. Corn futures at $2.55/bu. _______________________________________ Profit $0.5/bu.
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Hedgers and Speculators Headgers- Own or will own actual cash commodity. Speculators- Buy and sell futures contracts and hope to make profit by predicting market movements.
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