1. AGEC 420, Lec 101 AGEC 420 Review Quiz 2 Assignments Trading – on Friday –Wheat Market Types of Orders Reading –CME – Hedging with Livestock Fututres –www.cme.com/education/library/index.cfmwww.cme.com/education/library/index.cfm

2. AGEC 420, Lec 102 Assignment 3 - HedgeSim Waters 336 – Computer Lab –You are a grain or livestock producer –Takes about ½ hour –Demo

3. AGEC 420, Lec 103 Trading Wheat Market –Weather, Exports Weekly Reports Mondays -- 10am, export inspections Thursdays -- 7:30am, export sales Charts on the web http://tfc-charts.w2d.com/

4. AGEC 420, Lec 104 Hedging with futures Advantages –Reduce exposure to price risk Disadvantages –Lose the opportunity to gain from favorable price move –Margin calls

5. AGEC 420, Lec 105 Market Order An order to take a position “at the market” executes immediately at the best available price Example “sell 1 July wheat at the market” Advantage – guaranteed fill (usually?) Disadvantage – no control over fill price

6. AGEC 420, Lec 106 Limit Order An order to take a position at a specified price or “better” “Better” = lower if buying, higher if selling Example “sell 1 July wheat at 2.98” Advantage –control over price Disadvantage – may not be filled

7. AGEC 420, Lec 107 Market if Touched (MIT) A condition that converts a limit order to a market order Example –July wheat at about 2.96 – 2.97 –Order - “sell 1 July wheat at $2.98 MIT” –If price reaches $2.98 – order becomes a market order Advantage – some control over price Disadvantage – may not be filled

8. AGEC 420, Lec 108 Stop orders Sell stop – –sell if price moves down –becomes a market order if the specified price is hit from above Buy stop – –buy if price moves up –becomes a market order if the specified price is hit from below

9. AGEC 420, Lec 109 Sell stop - uses Becomes a market order if touched from above. 1. Establishes a short hedge if market moves down Example: July wheat now at $3.00. You are concerned about prices going below $2.90. You place this order “sell 1 July wheat at $2.90 stop” If price goes down to $2.90 – you have a market order to sell

10. AGEC 420, Lec 1010 Sell stop - uses Becomes a market order if touched from above. 2. Limits losses (preserve profits) on an existing long position Example: You bought July wheat at $3.00. You want to limit your loss to 15c/bu. You place this order “sell 1 July wheat at $2.85 stop” If price goes down to 2.85 – you have a market order to sell

11. AGEC 420, Lec 1011 Buy stop - uses Becomes a market order if touched from below. 1. Establishes a long hedge if market moves up Example: Cattle feeder. May corn now at $2.10. Concerned about prices going above $2.40. Uses this order “buy 1 May corn at $2.40 stop” If price gets up to $2.40 – it becomes a market order to buy

12. AGEC 420, Lec 1012 Sell stop - uses Becomes a market order if touched from below. 2. Limits losses (preserve profits) on an existing short position Example: You sold July wheat at $3.00. You want to limit your loss to 15c/bu. You place this order “buy 1 July wheat at $3.15 stop” If price goes up to $3.15 – you have a market order to buy

13. AGEC 420, Lec 1013 Delivery vs Offsetting Why not Deliver? –Usually costs less to offset! Arbitrage – –forces basis at maturity to be no greater than delivery cost. If price difference > delivery cost –  profit opportunity

14. AGEC 420, Lec 1014 Offset vs Delivery: Example 1. Feb 4: plan to sell 5,000bu wheat in July July futures @ $3.20, Expected basis -$0.10. Expected price = 3.20 - 0.10 = $3.10 July 1: Local price $2.45, July futures @ $2.50 Offset: Net price: 2.45 + 0.70 = $3.15 Deliver: Net price: 3.20 - $0.10 freight = $3.10

15. AGEC 420, Lec 1015

16. AGEC 420, Lec 1016 Offset vs Delivery: Not used. Feb 4: Feedyard needs to buy corn for June. July futures @ $2.50, Exp. basis is -$0.20 Expected (net forward) price = 2.50 – 0.20 = $2.30 June 1: Local price is $3.50. July futures @ $3.70 Offset: Net price: 3.50 - 1.20 = $2.30 Deliver: Net price: 2.50 + $0.20 freight = $2.70

17. AGEC 420, Lec 1017 Market Information USDA Natl.Ag.Stat.Service (NASS) World Ag. Outlook Board (WAOB) Links are on the class website. USDA Reports via e-mail usda-reports@usda.mannlib.cornell.edu write e.g. subscribe cattle in message area