Price Risk Developing a Marketing Plan and Marketing Tools Basics

1. Instruction Guide Price Risk Developing a Marketing Plan and Marketing Tools Basics Country Hedging, Inc., Cenex Harvest States 5500 Cenex Drive Inver Grove Heights, MN 55077-1733 1-800-243-3432 or www.countryhedging.com The information contained in this presentation is taken from sources which we believe to be reliable, but is not guaranteed by us as to accuracy or completeness and is presented to you for information purposes only. There is a risk of loss when trading commodity futures and options. Country Hedging, Inc. bases its recommendations solely on the judgment of Country Hedging, Inc. personnel.

3. 3 Major Decisions Old Crop - Sell Cash Store cash New Crop - Sell Production Marketing Decisions Sell Cash (in bin) Store Grain Sell Production Why sell Production? Why Sell? Why Store? Scale Up Strategy Need Money Waiting for Better Price Like Price Like Price Marketing Tools to Use Sell Cash/Buy Call Delayed Price Sell Futures Sell Cash/Buy Futures Buy Put Option Basis Fixed Hedge to Arrive Cash Sale

4. Does anyone have ‘97 crop? 1999 Crop How much to sell? When to sell? All at some point Spread risk - sell before harvest Corn or wheat Pre-Harvest Harvest Storage

5. Market Plan Selling Seasons: Pre-Plant Growing Harvest Storage NewOld Pre-Plant Storage Growing Harvest New Crop Plan Old Crop Plan Football Analogy- Coach has a game plan. When does the coach want to score? How many coaches wait until the 4th quarter to implement their game plan? How many coaches wait until the game is over to score? carry crop for more than one year

6. Are you comfortable with loan rate?

7. Is it easy to sell in a weather market? When does a weather market give me pricing opportunities? Key to moving price around report dates Ask the group - Of the 3 major components that move price (weather, acres, demand) which moves price the most? All the answers are right. The question that needs to be answered is: When do I implement my plan when the 3 events listed above - give me an opportunity to price my grain and implement my Plan.

8. Most Important 20% Forward Contract (Price Ins.) Min. Price 30% Forward Contract 50% (Price Ins.) Min. Price 50%

9. CORN 30% 20% 3-31 10% 10% 3-31 20% 20% 6-30 10% 6-30 30%

10. (Today’s Date) Corn Soybeans Wheat -- Local cash bid -- --Local bid for new crop delivery -- Est. cost of production (use range) with low prices Use cash flow # What was the highest cash price you could have received for old crop grain - may occur in previous year What was the highest cash price for new crop grain What if we have a short crop? How high can prices go? Normal to large crop - price expectations What is your next sales objective? Selling zone Break up in groups - record and use for plan

11. 99 Corn 30 20 2.91 1/2 Dec. Corn 2.38 Dec 53 1/2 Mar 2.56 July 53 1/2 x .33 + 238 53 1/2 x .50 + 238 2.64 3/4 53 1/2 x .66 + 238 2.73 3/4 Pre-Plant Growing 20 30 10 15 10% 2.70 2.75 Z futures 10% 2.60 Z futures 10% 2.60 Z Put - .15 Premium 2.45 Min. Futures 2.70 Z Futures -. 15 Premium 2.55 Min. Futures 10% 10%

12. 98 Corn 3.05 March Corn 2.09 1/2 March 95 1/2 May 95 1/2 x .33 +209 1/2 2.42 July 95 1/2 x .50 +209 1/2 2.57 1/4 95 1/2 x .66 +209 1/2 2.73 1/2

13. Joe Farmer 1-1-99 Corn 50,000 20,000 30,000 20,000 20,000 30,000 30,000 20,000 20,000 (.25) 2-28 10,000

14. Corn 1-1-99 Corn 2.10 940 1100 140 130 130 65% 40% 40% 30% 1.84 -30 Dec. corn Z calls 10% 2.60 3-31 3.00 - 6 cents 2.70 3-31 3.00 - 6 cents 10% 10% 2.75 7-4 3.00 - 6 cents 2.80 7-4 3.00 - 6 cents 10% 10% 2.60 3-31 .15 2.70 10% .15 7-4 10% 2.80 .10 7-4

15. Farmer Owned Reserve

20. Marketing Tools Basics

23. Lower prices Buy back or make delivery Short Sell back or take delivery Higher prices Long

25. Note: Explains concept of margin and how money in previous example goes into or out of account. Wheat 5,000 bushel 1/4 cent per bu. $12.50 (5000 x .0025) 20 cents/bu. $1000 (5000 x .20) $1000 $800 $4.00 -0- $1000 -.03 x 5000 = -$150 $4.03 1 $850 $750 +$250 = $1000 -.02 x 5000 = -$100 2 Margin Call $4.05 +.05 x 5000 = +$250 $4.00 $1250 3 +.10 x 5000 = +$500 4 $3.90 $1750 +.20 x 5000 +$1000 $3.70 5 $2750

33. $4.00 4.00 (at expiration) 0 $4.40 No value when you have the right to sell lower than futures. $4.20 0 $4.00 $4.00 0 $3.80 $.20 Right to sell futures above the current price-value here $.40 $3.60

34. $4.00 4.00 Right to buy lower than futures has value $4.40 $.40 $4.20 $.20 $4.00 0 $4.00 call $3.80 0 Right to buy higher than futures has no value at expiration $3.60 0

35. $4.00 $3.80 $4.00 $4.20 0 0 $.20 $.20 $.15 $.10 $.10 $.20 $.35

36. $4.00 $3.80 $4.00 $4.20 $.20 0 0 $.15 $.20 $.10 $.35 $.20 $.10

37. $4.00 $4.20 $3.80 $4.00 $4.00 $3.80 $4.20 (Strike prices with intrinsic value are “in-the-money”)

38. Describes rights held by option buyers and obligations of option sellers.

40. SEP HRSW $4.00 $4.00 -0.20 (best to use local basis estimate) 0 $3.80

41. 3.00 HRSW 3.00 MAR $3.00 0.20 $2.80

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