1. Commodity Marketing Activity
Chapter One

2. Marketing History Chicago 1840’s - merchants buy corn from farmers
1850’s - merchants buy corn on time contracts (forward contracts) to be delivered at a later date to minimize risk
Speculators appeared, buying and selling forward contracts, not intending to take delivery of the corn, but make a profit

3. Marketing History
Forward Contracts were traded on street curbs and in public squares
1850’s Chicago merchants began trading forward contracts for wheat for eastern millers and exporters
Board of Trade in Chicago had been established in 1848 to promote commerce

4. Marketing History
1859 State of Illinois authorized Board to establish quality standards, measure, gauge, weigh, and inspect grain
Trading moved from the street to the Board of Trade
At first, very disorganized: people disappeared before delivery, others couldn’t pay

5. Marketing History
1865 Board required a “Margin”, standardized contract terms for quantity, quality, delivery procedures, and payment terms
These standardized agreements were called Futures Contracts
Grain Exchanges formed in Minneapolis, Duluth, Milwaukee, Omaha, Kansas City, St. Louis, Toledo, Baltimore, San Francisco, New York

6. Marketing History
Chicago Mercantile Exchange in 1874 (Chicago Produce Exchange) for butter, eggs, poultry, and other farm products
Exchanges continue to evolve as need arises
Durum Futures contracts in Minneapolis

7. Marketing History 1922 Grain Futures Act - regulate trading
1936 Commodity Exchange Act made it illegal to “fix prices”
1974 Commodity Futures Trading Act est. the Commodity Futures Trading Commission as the independent federal body that oversees all futures trading in U.S.
Exchanges today page 5

8. The Participants Commodity Exchange: place to trade, rules
Clearing House: day-to-day settlement of all accounts, guarantees all contracts
Brokerage House: places orders for contracts for businesses or individuals (commission)
Traders: buys & sells contracts on the exchange floor in open outcry

9. Traders Private Speculator: try to make money buying & selling
Day Trader: close their position before the end of the trading day
Position Trader: take relatively large positions in market and hold their position for a long time
Floor Broker: agent for customers
Hedger: use futures to offset risk of changing prices in the cash market. Transfer risk to speculators

10. Marketing Choices Cash Sales: deliver your crop to elevator etc.
Forward Contract: negotiate now for delivery later
Futures Contract: agreement to buy or sell at a date in the future
Hedging: minimize risk in cash market
Options on Futures Contracts: right, but not the obligation to buy or sell a futures contract at a specified price

11. Hedging You have wheat You sell wheat futures contract
If prices fall, you sell your wheat at the lower price, but realize a gain in the futures market
If prices rise, works the opposite way
Price is lock in

12. Cash Markets Basis: Cash Price - Futures Price
Ex: $ $2.60 = -$.20 or 20 cents under
Ex: $ $2.54 = $.01 or 1 cent over
Deferred Pricing Agreement: deliver commodity, agree to set a price later
Basis Contract: type of Forward Contract, lock in a basis relating to a specified futures contract.
Ex: basis -$.20 Cash = $2.64 at selling time
you will get $2.44