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Published byClaude Welch Modified over 9 years ago
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Definition u A market is an arena for organizing and facilitation business activities. u Define a market –FormWhat –PlaceWhere –TimeWhen –Institutional level Who
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Examples u Iowa-Southern Minnesota u Hog carcasses u 185 pound, 51-52% lean u Plant delivered u January 10, 2003 u Boneless pork loins –Farmland –Hormel u Hy-Vee meat department u Ames, Iowa u January 10, 2003
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Cash or Spot Market u When: Immediate ore near-term delivery u What: Commodities –Defined by minimum standards –Often set by USDA u Where: Typically at buyer’s location –Elevator, processor, auction u Who: Depends on level –Farmer-first handler-processor-wholesaler- retailer
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Cash or Spot Market u #2 yellow corn, Heartland Coop at Nevada, January 5, 2004, farmer to first handler. u #1 yellow soybeans, north central Iowa elevators, January 5, 2004, farmer to first handler. u Fed cattle 65-80% Choice, Nebraska feedlots, January 7, 2004, feedlot to packer u Iowa-S. Minnesota 51-52% Lean hogs, plant delivered, January 7, 2004, farmer to packer. u Medium-Large Frame steers 600-650 pounds, Dunlap Iowa Auction, January 3, 2004, cowherds to feedlots.
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Futures markets u Today’s price for products to be delivered in the future. u A mechanism of trading promises of future commodity deliveries among traders. u Biological nature of ag production –Prices not known when production decision is made –Processors need year around supply
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Futures Market Exchanges u 12 organized exchanges u Two largest –Chicago Board of Trade (CBOT) »Grains, interest rates »http://www.cbot.com/ –Chicago Mercantile Exchange (CME) »Livestock, financial, currencies »http://www.cme.com/ –Combined for 75% of futures volume
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Semester long assignment u Choose and follow a commodity each week throughout the semester. u Due each Tuesday –Brief (less than one page) analysis of factors that impacted the market the previous Monday – Friday –Calculate your margin account based on Friday’s close.
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Sources for information u Links also on class web site u Cash –http://www.ams.usda.gov/lsg/mncs/index.htm –http://www.extension.iastate.edu/cgi- bin/Notes/rnoteindex.pl?COMMODITY u Futures –http://www.cme.com/ –http://www.cbot.com/http://www.cbot.com/ u Analysis –http://www.econ.iastate.edu/outreach/agriculture/periodi cals/ifo/ –http://www.agribiz.com/merchdiz/analysis.htmlhttp://www.agribiz.com/merchdiz/analysis.html
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Due Tuesday Jan 20 u Pick a commodity u Define the cash market and report the price. u Find and report the futures price for the same commodity for Friday. –Choose a contract month that expires after the end of the class. –July or later for corn, wheat, or soybeans –June or later for cattle, feeder cattle and hogs
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Futures Market Exchanges u Trading pits u Centralized pricing –Buyers and sellers represented –All information represented u Perfectly competitive market –Open out-cry trading
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The futures contract u A legally binding contract to make or take delivery of the commodity –Form (wt, grade, specifications) –Time (delivery date) –Place (delivery location) –Possession (seller delivers, buyer receives)
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The futures contract u Standardized contract u No physical exchange takes place when the contract is traded. u Deliveries are made when the contract expires (delivery time) u Payment is based on the price established when the contract was initially traded.
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Standardized contract u Certain delivery (contract) months u Fixed size of contract –Grains 5,000 bushels –Livestock in pounds »Lean Hogs 40,000 lbs carcass »Live Cattle 40,000 lbs live »Feeder Cattle 50,000 lbs live u Specified delivery points –Relatively few delivery points
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Market position u Objective: Buy low, sell high u You can either buy or sell initially –Sell a December Corn contract initially »Short the market »Buy back at a later date –Buy a February Live Cattle contract initially »Long the market »Sell back at a later date
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Margin account u Highly leveraged trades –Margin is the earnest money that must be maintained in the trader’s account –Often 5-10% of full value u Margin account settled everyday –Must maintain account balance –Margin call u Calculate as if you had to get out of the market every day.
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Margin Account Example u Corn Contract –5,000 bushels @ $2.80 = $14,000 –Margin = $500 u Cattle contract –40,000 pounds @ $.70 = $28,000 –Margin $1,000
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Margin Account u Initial margin: The amount needed to open and account. u Maintenance margin: The minimum amount needed to keep and account open. u “Mark to the Market” at the close of each trading day.
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Margin Account Example u Initial margin$1,000 u Maintenance margin$800 u Corn contract (5000 bushels) –Day 1:Sell at 2.55
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Margin Account Example DayPriceChgG/LMargin 12.54+.01+50.001050.00 22.58-.04-200.00850.00 32.61-.03-150.00700.00 Below Maintenance Margin must make $100 margin call 800.00 42.52+.09+450.001250.00 Changes reflect the initial “sell” of the contract
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Margin Account Example Note that you can calculate your margin account if you know the initial margin, any additions or removals and the current closing price.
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