1. Agricultural Marketing
ECON 339X:
Agricultural Marketing
Chad Hart
Assistant Professor
John Lawrence
Professor 1

2. Going Short Sold Nov. 2011 Soybeans @ $12.73, 1/11/11 Futures @ $13.36
63 cent shift
Cash quote for Oct. soybeans from Alleman
1/11/11 $11.92
1/19/11 $12.55
63 cent shift

3. Short Hedge Expected Price
Futures prices when I place the hedge
+ Expected basis at delivery
– Broker commission
In my example:
($ per bushel)
Nov soybean futures
Historical basis for Nov
Commission on trade
Expected local hedged price

4. Short Hedge Margin Example
Date
Price
Gain
Margin Call
Account Balance
1/11/11
$12.73
$3,250
1/12/11
$13.08
-$1,750
$1,750
1/13/11
$13.12
-$200
$200
1/14/11
$13.23
-$550
$550
1/18/11
$13.26
-$150
$150
1/19/11
$13.36
-$500
$500
Overall
$3,150

5. Going Long Bought Dec. 2011 Corn @ $5.48, 1/11/11 Futures @ $5.68
20 cent shift
Cash quote for Nov. corn from Alleman
1/11/11 $4.91
1/19/11 $5.10
19 cent shift

6. Long Hedge Example Expected price =
Futures prices when I place the hedge
+ Expected basis at delivery
+ Broker commission
In my example:
($ per bushel)
Dec corn futures
Historical basis for Dec
Commission on trade
Expected local net price

7. Long Hedge Margin Example
Date
Price
Gain
Margin Call
Account Balance
1/11/11
$5.48
$1,500
1/12/11
$5.60
+$600
$2,100
1/13/11
$5.70
+$500
$2,600
1/14/11
$5.71
+$50
$2,650
1/18/11
$5.78
+$350
$3,000
1/19/11
$5.68
-$500
$2,500
Overall $0

8. 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

9. Corn Futures Trade Source: CFTC
Another factor is a recent return of the funds in the market.
Source: CFTC 9 9

10. Soybean Futures Trade Source: CFTC
Another factor is a recent return of the funds in the market.
Source: CFTC 10 10

11. Bullish Speculator Time Now Later Maturity No futures position
“Long” futures position
No futures position
Time
Now
Later
Maturity
Buy futures contract
Sell contract back
“Open” a “long” futures position
“Close” the “long” position
“Make” a promise
“Offset” the promise

12. Going Long
Bought Dec $5.48, 1/11/11

13. Bearish Speculator Time Now Later Maturity No futures position
“Short” futures position
No futures position
Time
Now
Later
Maturity
Sell futures contract
Buy contract back
“Open” a “short” futures position
“Close” the “short” position
“Make” a promise
“Offset” the promise

14. Going Short
Sold Nov $12.73, 1/11/11

15. Speculators Speculators:
Buy or sell in an attempt to profit from favorable price movements
Face the risk of losses from unfavorable price movements
Do not produce or consume the commodity
Benefit the market because they add liquidity
Often trade the news of the day

16. Why Speculators Like Futures Markets
Relatively little capital required
Initial margin, margin calls
No need to handle commodity (e.g., transportation, storage, cleaning)
Easy to speculate on either side of the market (Up or Down)

17. How Would You Speculate?
Sudden death syndrome in soybeans returns to Iowa for the 2nd year in a row
Reports of a bumper crop in Argentine corn
China rumored to be in the market for corn
Inflation is projected to rise

18. Day Traders Looking for quick within-day price moves
Might be “long” today and “short” tomorrow
Limit the risk they face by limiting their amount of time in the market

19. Class web site: