1. AGEC 420, Lec 241 AGEC 420 Markets TradeSim rankings Storage assignment due Wed – Guest Speaker – Dr. Mintert April 4 – White Commercial, 5pm, WA 328 Today – –Currency hedge –Soybean Comlex

2. AGEC 420, Lec 242 Open Position - MidAm Corn Bot 1 MidAm Dec Corn @ 2.29¼, March 6 Close $ +/- Fri., Mar 222.25 ½ -$40.00 http://www.cbot.com/cbot/charts/detail/0,1551,13+44 +120+C+Z2+1+1,00.html Cattle: http://futures.tradingcharts.com/chart/LC/42http://futures.tradingcharts.com/chart/LC/42

3. AGEC 420, Lec 243 Currency Hedge Scenario: US Meat company exporting to a Japanese wholesaler. Delivery and payment will be in June US firm wants to get paid in $ Japanese firm wants to pay in Yen --> someone will face currency risk

4. AGEC 420, Lec 244 Currency Hedge (cont.) With payment in Yen, U.S. firm faces risk March 25: Negotiated price is $50,000 at today’s exchange rate (ER) of $0.80/100Y => payment of 6,250,000Y in June

5. AGEC 420, Lec 245 Currency Risk In June, Yen may be worth less at $0.75/100Y, 6.25mill Yen = $46,875 => if the Yen drops, US company looses. To hedge against this risk? => sell the yen futures contract for June

6. AGEC 420, Lec 246 The Soybean Complex Soybeans: 5,000 bu. contract; Quoted as $/bu May @ 5164  $5.16½ /bu (min tick = ¼ c) One bushel (60 lbs) of beans yields: –11 lbs Soybean Oil: –48 lbs Soybean Meal:

7. AGEC 420, Lec 247 Soybean Oil and Meal Soybean Oil 60,000 lb contract Quoted as c/lb May @ 1623  16.23c/lb (min tick is.01c) Soybean Meal 100 ton contract [1 ton = 2000 lb] Quoted as $/ton May @ 1682  $168.20/ton (min tick is 10c)

8. AGEC 420, Lec 248 Soybean Processor Gross margin = Revenue - Costs On a per bushel basis: Revenue = Q oil *P oil + Q meal * P meal

9. AGEC 420, Lec 249 Revenue from Oil & Meal Oil Revenue Per Bushel of Beans = 11 lbs oil/bu * P oil /lb Meal Revenue Per Bushel of Beans = 48 lbs meal/bu * P meal /ton / 2000 lbs/ton

10. AGEC 420, Lec 2410 Gross Margin per Bushel Revenue = Q oil *P oil + Q meal * P meal = 11* P oil + 48* P meal /2000 = 11* P oil + 48/2000* P meal Cost = P beans

11. AGEC 420, Lec 2411 Gross margin - example Yesterdays prices for May contracts: Soybeans -- $5.15 (screen quote is 5150) Soybean Oil -- 16.37 c/lb (quoted as 1637) –oil revenue per bushel = 11*(16.37) = $1.80 Soybean Meal -- 166.90 $/ton (quoted as 1669) –meal revenue = 48/2000*(166.90) = $4.01

12. AGEC 420, Lec 2412 Gross margin - example Total Revenue –$1.80 + $4.01 = $5.81 Total Cost –$5.15 Gross margin = $0.66

13. AGEC 420, Lec 2413 Gross margin – May 1999 Using prices for May 1999 contracts: Soybeans = $4.99 Soybean Oil -- 19.58 c/lb –oil revenue per bushel = 11*(19.58) = $2.15 Soybean Meal -- 136.10 $/ton –meal revenue = 48/2000*(136.10) = $3.27

14. AGEC 420, Lec 2414 Gross margin – May 1999 Total Revenue –$2.15 + $3.27 = $5.42 Total Cost –$4.99 Gross margin = $0.43

15. AGEC 420, Lec 2415 Processors risk P beans  and/or P oil, P meal  Processor can lock in a margin by using a “spread hedge” (often called a “crush spread” or “putting on the crush”)

16. AGEC 420, Lec 2416 Putting on the Crush The simultaneous purchase of soybean futures and sale of soybean meal and soybean oil futures to lock in the processing margin

17. AGEC 420, Lec 2417 Crush Spread - example Buy May beans @ $4.99; Sell May oil @ 19.58; Sell May meal at 136.10 Exercise: Setting basis = zero, find the actual margin if May prices are: a) beans @ 5.23; oil @ 19.60; meal @ 137.00 b) beans @ 4.75; oil @ 19.56; meal @ 135.20

18. AGEC 420, Lec 2418 Crush Spread How many contracts of each? If you use 1:1:1 of Beans:Oil:Meal, are you adequately covered? What is the correct ratio? –See handout on ‘Soybean Crush’ – on webpage