1. AGEC 420, Lec 211 AGEC 420 Assignment 5 - Storage Hedge TRADESIM – trade by Wed, March 13 Alternatives to Storage Hedge Wed: Pit Simulation Exercise

2. AGEC 420, Lec 212 Open Position - MidAm Wheat Fri., Feb 15: Bot 1 MidAm May Wheat @ 2.82; Sell stop @ 2.74½ Close $ +/- Fri., Feb 15 2.81 ¾ -$2.50 Fri., Feb 222.86 ¼ +$42.50 Fri., Mar 1 2.78 ½ -$35.00 Fri., Mar 8 2.77 ¾ -$42.50 Today: Stopped out @ 2.71½ -$105.00

3. AGEC 420, Lec 213 Open Position - MidAm Corn Wed., Mar 6: Bot @ 229¼ Fri., Mar 8 2.29 ½ +$2.50

4. AGEC 420, Lec 214 Storage Hedge Store only if and as long as the expected basis improvement exceeds storage cost Consider it if basis is very weak at harvest

5. AGEC 420, Lec 215 Alternatives to Storage Hedging Speculative storage Basis contract or Delayed price (DP) contract Sell grain and buy futures (or call options) Reading: Chapter 24, Merchants Edge

6. AGEC 420, Lec 216 Speculative Storage Producer retains title to the grain Pay monthly fee (e.g., 3c/bu) Risk – price may fall

7. AGEC 420, Lec 217 Basis Contract A contract between seller (farmer) and buyer (elevator) that specifies a basis level to be used in calculating the final cash price. Typically: 1. Ownership is transferred to the buyer (elevator) 2. Buyer may make a partial payment up front - depends 3. Seller decides when (within a specified period) to calculate the final price

8. AGEC 420, Lec 218 Example July: Farmer and elevator sign basis contract Price: 10c under Dec. futures Time: anytime between August 1 and Dec. 1 Farmer delivers grain Elevator pays 50% of current price Farmer decides when to price the grain

9. AGEC 420, Lec 219 Features Producer No storage costs opportunity cost (on portion not paid) Lose control of the grain Price risk

10. AGEC 420, Lec 2110 Basis Contract Should the producer hedge it using futures? NO - producer uses a basis contract to take advantage of hopefully higher futures price Should the elevator hedge? What risk does the elevator face? See Purcell: Table 2.4

11. AGEC 420, Lec 2111 Spec. Storage vs Basis Contract Dec. 1: Beans - Cash $5.20, May futures $5.30 Storage cost = 5c/bu/mo Basis contract for 10 under May May 1: Cash $5.30, Futures @ $5.45 Basis contract: Net price is $5.35 (10 under May) Spec Storage: Net is $5.05 ($5.30 - 25c storage)

12. AGEC 420, Lec 2112 Delayed Pricing (DP) Contract Similar to basis contract, but neither price nor basis are fixed seller gets cash price at some future date –potential tax advantages no storage cost –but seller loses control seller has price and basis risk