1. Crop Marketing Winnebago County Grain Marketing Thompson, Iowa
Feb. 9, 2016
Chad Hart
Associate Professor/Crop Markets Specialist 1 1

2. 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

3. Cash vs. Futures Prices Iowa Corn in 2015
The gap between the lines is the basis.

4. Market Participants
Hedgers are willing to make or take physical delivery because they are producers or users of the commodity
Use futures to protect against a price movement
Cash and futures prices are highly correlated
Hold counterbalancing positions in the two markets to manage the risk of price movement

5. Hedgers Farmers, livestock producers Merchandisers, elevators
Food processors, feed manufacturers
Exporters
Importers
What happens if the futures market is restricted to only hedgers?

6. 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

7. Market Participants
Brokers exercise trade for traders and are paid a flat fee called a commission
Futures are a “zero sum game”
Losers pay winners
Brokers always get paid commission

8. Hedging
Holding equal and opposite positions in the cash and futures markets
The substitution of a futures contract for a later cash-market transaction
Who can hedge?
Farmers, merchandisers, elevators, processors, exporter/importers

9. 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

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

11. Short Hedge Example As of Jan. 15,
($ per bushel)
Nov soybean futures $ 8.85
Historical basis for Nov. $-0.30
Rough commission on trade $-0.01
Expected price $ 8.54
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

12. Prices Went Up, Hist. Basis
In November, buy back futures at $10.50 per bushel
($ per bushel)
Nov soybean futures $10.50
Actual basis for Nov. $-0.30
Local cash price $10.20
Net value from futures $-1.66
($ $ $0.01)
Net price $ 8.54

13. 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 $ 1.84
($ $ $0.01)
Net price $ 8.54

14. Short Hedge Graph
Hedging Nov $8.85

15. 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 $ 1.84
($ $ $0.01)
Net price $ 8.74
Basis narrowed, net price improved

16. Margin Accounts
A margin account is an account that traders maintain in the market to ensure contract performance. There are minimum limits on the size of the account.
Crop Trader Type Initial Maintenance
Corn Hedger/Speculator $1,100 $1,000
Soybeans Hedger/Speculator $2,310 $2,100
Lean Hogs Hedger/Speculator $1,320 $1,200
Live Cattle Hedger/Speculator $1,980 $1,800
To trade, you must create a margin account with at least the “Initial” amount and maintain at least the “Maintenance” amount in the account at the end of each trading day.

17. Margin Calls Margin accounts are rebalanced each day
Depending on the value of futures
Settlement price
If your futures are losing value, money is taken out of the margin account to cover the loss
If the account value falls below the “Maintenance” level, you receive a margin call (a call to put additional money in your margin account) and the balance is brought back up to the Initial amount

18. Margin Example Let’s say I went short on Mar. 2016 corn
$3.5175/bushel on Jan. 11
Along with selling a corn futures contract, I have to establish a margin account and deposit $1,100 in it
On Jan. 15, the Mar corn futures price moved to $3.6325/bushel
Since I’ll be buying the futures contract later, this price move is not in my favor

19. Margin Example
I lost 11.5 cents per bushel and since the contract is for 5,000 bushels, that’s a loss of $575
At the end of the day (Jan. 15), my margin account will be tapped for $575, lowering the account balance to $625
Since $625 is less than the “Maintenance” level ($1,000), I will receive a margin call and be asked to deposit $575 more into the account or to close out the futures position
The $575 brings the account balance back up to the initial requirement

20. Margin Example #2
Let’s say, instead of going short, I went long on May 2016 corn
$3.575/bushel on Jan. 11
Along with buying a corn futures contract, I have to establish a margin account and deposit $1,100 in it
On Jan. 15, the May 2015 corn futures price moved to $3.675/bushel
Since I’ll be selling back the futures contract later, this price move is in my favor

21. Margin Example #2
I gained 10 cents per bushel and since the contract is for 5,000 bushels, that’s a gain of $500
At the end of the day (Jan. 15), $500 will be added to my margin account, raising the account balance to $1,600
Since $1,600 is greater than the “Maintenance” level, I will not receive a margin call

22. Margin Example – Going Short
Date
Price
Gain
Margin Call
Account Balance
1/08/16
$3.6275
$1,100
1/11/16
$3.575
+$262.50
$1,362.50
1/12/16
$3.6225
-$237.50
$1,125
1/13/16
$3.63
-$37.50
$1,087.50
1/14/16
+$12.50
1/15/16
$3.675
+$237.50

23. Margin Example – Going Long
Date
Price
Gain
Margin Call
Account Balance
1/08/16
$3.6275
$1,100
1/11/16
$3.575
-$262.50
1/12/16
$3.6225
+$237.50
$1,337.50
1/13/16
$3.63
+$37.50
$1,375
1/14/16
-$12.50
$1,362.50
1/15/16
$3.675
$1,125

24. Dec. Corn Futures Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct
2000
2.34
2.28
2.49
2.52
2.53
2.64
2.40
1.94
1.87
1.96
2.08
2001
2.54
2.45
2.47
2.16
2.37
2.24
2.09
2002
2.46
2.39
2.31
2.30
2.19
2.22
2.26
2.33
2.62
2.76
2003
2.41
2.38
2.50
2.42
2.11
2.14
2004
2.48
2.81
2.95
3.11
2.85
2.80
2.07
2005
2.29
2.04
2006
2.43
2.57
2.63
2.71
2.82
2.68
2.77
3.15
2007
3.45
3.50
3.95
3.99
4.08
3.75
3.92
3.69
3.51
3.49
2008
4.32
4.51
5.13
5.30
5.75
6.04
6.50
7.65
6.29
5.18
5.63
4.03
2009
4.43
4.20
4.54
4.06
4.18
4.07
4.40
4.48
3.32
3.28
3.20
3.72
2010
4.37
4.38
3.97
3.94
3.80
3.71
4.27
4.78
2011
5.09
5.29
5.71
6.18
5.78
6.53
6.27
7.13
6.37
7.15
7.37
6.40
2012
5.74
5.52
5.55
5.60
5.37
5.05
5.44
7.40
8.09
7.82
7.51
2013
6.30
6.28
5.77
5.47
5.50
5.33
4.53
4.59
4.33
2014
4.69
4.58
4.60
4.87
4.99
3.79
3.64
3.39
3.34
Source: CBOT, Futures Price for 2nd Friday of the month

25. Marketing Types Harvest Averaging Price Target Time and Price
Extended Time and Price

26. Marketing Types Harvest
Takes the harvest price for 100% of their grain

27. Average Price Captured
Harvest
2000
1.66
2001
1.69
2002
2.29
2003
1.88
2004
1.73
2005
1.48
2006
2.69
2007
3.02
2008
3.69
2009
3.47
2010
5.04
2011
6.10
2012
7.42
2013
4.30
2014
2.96
Average
3.29
Min
Max

28. Marketing Types Averaging
Sells 10% of their grain via futures each month January-July
Sells the remaining 30% at harvest
Sets basis at harvest

29. Dec. Corn Futures Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct
2000
2.34
2.28
2.49
2.52
2.53
2.64
2.40
1.94
1.87
1.96
2.08
2001
2.54
2.45
2.47
2.16
2.37
2.24
2.09
2002
2.46
2.39
2.31
2.30
2.19
2.22
2.26
2.33
2.62
2.76
2003
2.41
2.38
2.50
2.42
2.11
2.14
2004
2.48
2.81
2.95
3.11
2.85
2.80
2.07
2005
2.29
2.04
2006
2.43
2.57
2.63
2.71
2.82
2.68
2.77
3.15
2007
3.45
3.50
3.95
3.99
4.08
3.75
3.92
3.69
3.51
3.49
2008
4.32
4.51
5.13
5.30
5.75
6.04
6.50
7.65
6.29
5.18
5.63
4.03
2009
4.43
4.20
4.54
4.06
4.18
4.07
4.40
4.48
3.32
3.28
3.20
3.72
2010
4.37
4.38
3.97
3.94
3.80
3.71
4.27
4.78
2011
5.09
5.29
5.71
6.18
5.78
6.53
6.27
7.13
6.37
7.15
7.37
6.40
2012
5.74
5.52
5.55
5.60
5.37
5.05
5.44
7.40
8.09
7.82
7.51
2013
6.30
6.28
5.77
5.47
5.50
5.33
4.53
4.59
4.33
2014
4.69
4.58
4.60
4.87
4.99
3.79
3.64
3.39
3.34

30. Average Price Captured
Harvest
Averaging
2000
1.66
1.91
2001
1.69
1.87
2002
2.29
2.11
2003
1.88
2.05
2004
1.73
2.24
2005
1.48
2006
2.69
2.35
2007
3.02
3.27
2008
3.69
5.13
2009
3.47
3.77
2010
5.04
3.84
2011
6.10
6.02
2012
7.42
6.17
2013
4.30
5.08
2014
2.96
3.85
Average
3.29
3.42
Min
Max

31. Marketing Types Price Target
Sells 25% of grain via futures when futures price > production cost
Sells 25% when futures > costs + $0.25
Sells 25% when futures > costs + $0.50
Sells remaining 25% at harvest
Sets basis at harvest
Defaults to harvest sales when price objectives are not reached
Will start selling in the November before planting

32. Costs of Production Cost Cost + 0.25 Cost + 0.50 2000 2.43 2.68 2.93
2001
2.56
2.81
3.06
2002
2.55
2.80
3.05
2003
2.42
2.67
2.92
2004
2.58
2.83
3.08
2005
2.79
3.04
3.29
2006
2.86
3.11
3.36
2007
3.54
2008
3.63
3.88
4.13
2009
4.43
4.68
4.93
2010
3.48
3.73
3.98
2011
3.99
4.24
4.49
2012
4.40
4.65
4.90
2013
4.46
4.71
4.96
2014
Source: Iowa State University Extension, Dr. Michael Duffy

33. Dec. Corn Futures Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct
2000
2.34
2.28
2.49
2.52
2.53
2.64
2.40
1.94
1.87
1.96
2.08
2001
2.54
2.45
2.47
2.16
2.37
2.24
2.09
2002
2.46
2.39
2.31
2.30
2.19
2.22
2.26
2.33
2.62
2.76
2003
2.41
2.38
2.50
2.42
2.11
2.14
2004
2.48
2.81
2.95
3.11
2.85
2.80
2.07
2005
2.29
2.04
2006
2.43
2.57
2.63
2.71
2.82
2.68
2.77
3.15
2007
3.45
3.50
3.95
3.99
4.08
3.75
3.92
3.69
3.51
3.49
2008
4.32
4.51
5.13
5.30
5.75
6.04
6.50
7.65
6.29
5.18
5.63
4.03
2009
4.43
4.20
4.54
4.06
4.18
4.07
4.40
4.48
3.32
3.28
3.20
3.72
2010
4.37
4.38
3.97
3.94
3.80
3.71
4.27
4.78
2011
5.09
5.29
5.71
6.18
5.78
6.53
6.27
7.13
6.37
7.15
7.37
6.40
2012
5.74
5.52
5.55
5.60
5.37
5.05
5.44
7.40
8.09
7.82
7.51
2013
6.30
6.28
5.77
5.47
5.50
5.33
4.53
4.59
4.33
2014
4.69
4.58
4.60
4.87
4.99
3.79
3.64
3.39
3.34

34. Average Price Captured
Harvest
Averaging
Price Target
2000
1.66
1.91
1.76
2001
1.69
1.87
2002
2.29
2.11
2.31
2003
1.88
2.05
1.96
2004
1.73
2.24
2.40
2005
1.48
2006
2.69
2.35
2007
3.02
3.27
3.11
2008
3.69
5.13
4.16
2009
3.47
3.77
3.68
2010
5.04
3.84
3.87
2011
6.10
6.02
5.25
2012
7.42
6.17
5.97
2013
4.30
5.08
5.63
2014
2.96
3.85
4.00
Average
3.29
3.42
3.33
Min
Max

35. Marketing Types Time and Price Sell 25% in March Sell 25% in April
Sell 25% in May
Sell 25% at harvest
Sets basis at harvest
Only make March-May sales if futures prices > production costs
Defaults to harvest sales if price objectives are not reached

36. Dec. Corn Futures Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct
2000
2.34
2.28
2.49
2.52
2.53
2.64
2.40
1.94
1.87
1.96
2.08
2001
2.54
2.45
2.47
2.16
2.37
2.24
2.09
2002
2.46
2.39
2.31
2.30
2.19
2.22
2.26
2.33
2.62
2.76
2003
2.41
2.38
2.50
2.42
2.11
2.14
2004
2.48
2.81
2.95
3.11
2.85
2.80
2.07
2005
2.29
2.04
2006
2.43
2.57
2.63
2.71
2.82
2.68
2.77
3.15
2007
3.45
3.50
3.95
3.99
4.08
3.75
3.92
3.69
3.51
3.49
2008
4.32
4.51
5.13
5.30
5.75
6.04
6.50
7.65
6.29
5.18
5.63
4.03
2009
4.43
4.20
4.54
4.06
4.18
4.07
4.40
4.48
3.32
3.28
3.20
3.72
2010
4.37
4.38
3.97
3.94
3.80
3.71
4.27
4.78
2011
5.09
5.29
5.71
6.18
5.78
6.53
6.27
7.13
6.37
7.15
7.37
6.40
2012
5.74
5.52
5.55
5.60
5.37
5.05
5.44
7.40
8.09
7.82
7.51
2013
6.30
6.28
5.77
5.47
5.50
5.33
4.53
4.59
4.33
2014
4.69
4.58
4.60
4.87
4.99
3.79
3.64
3.39
3.34

37. Average Price Captured
Harvest
Averaging
Price Target
Time and Price
2000
1.66
1.91
1.76
2.02
2001
1.69
1.87
2002
2.29
2.11
2.31
2003
1.88
2.05
1.96
2004
1.73
2.24
2.40
2.41
2005
1.48
2006
2.69
2.35
2007
3.02
3.27
3.11
3.28
2008
3.69
5.13
4.16
5.24
2009
3.47
3.77
3.68
2010
5.04
3.84
3.87
3.74
2011
6.10
6.02
5.25
5.94
2012
7.42
6.17
5.97
5.80
2013
4.30
5.08
5.63
5.12
2014
2.96
3.85
4.00
4.17
Average
3.29
3.42
3.33
3.41
Min
Max

38. Marketing Types Extended Time and Price
Sell 25% in March or when futures prices > production costs
Sell 25% in April or when futures prices > costs + $0.25
Sell 25% in May or when futures prices > costs + $0.50
Only make March-May sales if futures prices > costs
Sell remaining crop at harvest
Sets basis at harvest
Defaults to harvest sales if price objectives are not reached

39. Dec. Corn Futures Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct
2000
2.34
2.28
2.49
2.52
2.53
2.64
2.40
1.94
1.87
1.96
2.08
2001
2.54
2.45
2.47
2.16
2.37
2.24
2.09
2002
2.46
2.39
2.31
2.30
2.19
2.22
2.26
2.33
2.62
2.76
2003
2.41
2.38
2.50
2.42
2.11
2.14
2004
2.48
2.81
2.95
3.11
2.85
2.80
2.07
2005
2.29
2.04
2006
2.43
2.57
2.63
2.71
2.82
2.68
2.77
3.15
2007
3.45
3.50
3.95
3.99
4.08
3.75
3.92
3.69
3.51
3.49
2008
4.32
4.51
5.13
5.30
5.75
6.04
6.50
7.65
6.29
5.18
5.63
4.03
2009
4.43
4.20
4.54
4.06
4.18
4.07
4.40
4.48
3.32
3.28
3.20
3.72
2010
4.37
4.38
3.97
3.94
3.80
3.71
4.27
4.78
2011
5.09
5.29
5.71
6.18
5.78
6.53
6.27
7.13
6.37
7.15
7.37
6.40
2012
5.74
5.52
5.55
5.60
5.37
5.05
5.44
7.40
8.09
7.82
7.51
2013
6.30
6.28
5.77
5.47
5.50
5.33
4.53
4.59
4.33
2014
4.69
4.58
4.60
4.87
4.99
3.79
3.64
3.39
3.34

40. Average Price Captured
Harvest
Averaging
Price Target
Time and Price
Extended Time and Price
2000
1.66
1.91
1.76
2.02
2001
1.69
1.87
2002
2.29
2.11
2.31
2.35
2003
1.88
2.05
1.96
2004
1.73
2.24
2.40
2.41
2.33
2005
1.48
2006
2.69
2007
3.02
3.27
3.11
3.28
2008
3.69
5.13
4.16
5.24
2009
3.47
3.77
3.68
2010
5.04
3.84
3.87
3.74
2011
6.10
6.02
5.25
5.94
2012
7.42
6.17
5.97
5.80
2013
4.30
5.08
5.63
5.12
2014
2.96
3.85
4.00
4.17
Average
3.29
3.42
3.33
3.41
3.34
Min
Max

41. Extended Time and Price
Lowest Average
Harvest
Averaging
Price Target
Time and Price
Extended Time and Price
2000
1.66
1.91
1.76
2.02
2001
1.69
1.87
2002
2.29
2.11
2.31
2.35
2003
1.88
2.05
1.96
2004
1.73
2.24
2.40
2.41
2.33
2005
1.48
2006
2.69
2007
3.02
3.27
3.11
3.28
2008
3.69
5.13
4.16
5.24
2009
3.47
3.77
3.68
2010
5.04
3.84
3.87
3.74
2011
6.10
6.02
5.25
5.94
2012
7.42
6.17
5.97
5.80
2013
4.30
5.08
5.63
5.12
2014
2.96
3.85
4.00
4.17
Lowest
out of
15 years 10 2 3 6 4

42. Extended Time and Price
Highest Average
Harvest
Averaging
Price Target
Time and Price
Extended Time and Price
2000
1.66
1.91
1.76
2.02
2001
1.69
1.87
2002
2.29
2.11
2.31
2.35
2003
1.88
2.05
1.96
2004
1.73
2.24
2.40
2.41
2.33
2005
1.48
2006
2.69
2007
3.02
3.27
3.11
3.28
2008
3.69
5.13
4.16
5.24
2009
3.47
3.77
3.68
2010
5.04
3.84
3.87
3.74
2011
6.10
6.02
5.25
5.94
2012
7.42
6.17
5.97
5.80
2013
4.30
5.08
5.63
5.12
2014
2.96
3.85
4.00
4.17
Highest
out of
15 years 4 2 6

43. Extended Time and Price
Longer History
Harvest
Averaging
Price Target
Time and Price
Extended Time and Price
Average
2.59
2.70
2.65
2.66
Min
1.14
1.41
Max
7.42
6.17
5.97
5.94
Low Price 25 8 4 11 9
High Price 10 16
Out of 39 years ( )

44. 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: