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

2. Old Crop/Livestock Weekly Table
May
Strike Price
7.30
Date
Spot Cash
Futures
Basis
Forward Cash
Forward Basis
Put Premium
Call Premium
Corn
1/16/2013
7.26
7.3125
1/23/2013
7.16
7.2275
7.22
0.35
0.2775
14.20
Soybeans
14.18
13.83
13.94
June
Live Cattle
-3.745
3.350
3.225
-2.625
3.900
2.525
96.000
Lean Hogs
84.840
96.650
3.300
3.950
87.580
96.900
-9.320
3.100
4.000

3. New Crop/Livestock Weekly Table
Oct
Dec
Strike Price
5.90
Date
Forward Cash
Futures
Basis
Put Premium
Call Premium
Corn
1/16/2013
5.45
5.9225
0.5225
0.545
1/23/2013
5.43
5.9025
0.53
0.5325
Nov
13.00
Soybeans
12.22
12.97
-0.75
12.30
13.045
-0.745
0.8775
0.9225
Feb
136.00
Live Cattle
135.00
5.225
4.225
134.00
5.700
3.725
84.00
Lean Hogs
84.40
4.275
4.675
85.00
4.075
5.075

4. 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

5. Corn Futures Trade
Source: CFTC 5 5

6. Soybean Futures Trade
Source: CFTC 6 6

7. Live Cattle Futures Trade
Source: CFTC 7 7

8. Lean Hogs Futures Trade
Source: CFTC 8 8

9. 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

10. Going Long
Bought April 2013 Lean $ on Jan. 25

11. 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

12. Going Short
Sold April 2013 Live $ on Jan. 25

13. 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

14. 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)

15. How Would You Speculate?
Drought conditions are projected for the Corn Belt
Reports of a bumper crop in Brazilian soybeans
Rumors of foot and mouth disease in the U.S.
Inflation is projected to rise

16. 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

17. Going Short
Sold April 2013 Live $ on Jan. 25

18. Short Hedge

19. Going Long
Bought April 2013 Lean $ on Jan. 25

20. Long Hedge

21. 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

22. Cash Bids Key Coop, Gilbert
Key Coop, Lincolnway Energy
Heartland Coop
Cargill
West Central Coop

23. 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?
Boone (16 miles) Gilbert (8 miles)
Nevada (10 miles) Alleman (16 miles)
Eddyville (100 miles)

24. 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

25. Class web site: Have a great weekend!
Have a great weekend!