ECON 337: Agricultural Marketing

1. ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911

2. Market Participants • Speculators have no use for the physical commodity • They buy or sell in an attempt to profit from price movements • Add liquidity to the market • May be part of the general public, professional traders or investment managers • Short-term – “day traders” • Long-term – buy or sell and hold

3. Corn Futures Trade Source: CFTC

4. Soybean Futures Trade Source: CFTC

5. Live Cattle Futures Trade Source: CFTC

6. Lean Hogs Futures Trade Source: CFTC

7. Bullish Speculator No futures position “Long” futures position No futures position Time Now Later Maturity Buy futures contract Sell contract back “Open” a “long” futures position “Close” the “long” position “Make” a promise “Offset” the promise

8. Going Long Bought Dec. 2014 Corn @ $4.47

9. Bearish Speculator No futures position “Short” futures position No futures position Time Now Later Maturity Sell futures contract Buy contract back “Open” a “short” futures position “Close” the “short” position “Make” a promise “Offset” the promise

10. Going Short Sold Nov. 2014 Soybeans @ $11.09

11. Speculators • Speculators: • Buy or sell in an attempt to profit from favorable price movements • Face the risk of losses from unfavorable price movements • Do not produce or consume the commodity • Benefit the market because they add liquidity • Often trade the news of the day

12. Why Speculators Like Futures Markets • Relatively little capital required • Initial margin, margin calls • No need to handle commodity (e.g., transportation, storage, cleaning) • Easy to speculate on either side of the market (Up or Down)

13. How Would You Speculate? • Flooding is projected for Iowa • Reports of a bumper crop in Brazilian soybeans • Rumors of foot and mouth disease in the U.S. • Inflation is projected to rise

14. Day Traders • Looking for quick within-day price moves • Might be “long” today and “short” tomorrow • Limit the risk they face by limiting their amount of time in the market

15. Going Short Sold Nov. 2014 Soybeans @ $11.09

16. Short Hedge Hedging Nov. 2014 Soybeans @ $11.09

17. Going Long Bought Dec. 2014 Corn @ $4.47

18. Long Hedge Hedging Dec. 2014 Corn @ $4.47

19. Cash Contracts • When we talk about a cash contract, it is an agreement between a seller and a buyer covering a quantity and quality of a product to be delivered at a specified location and time for a specific price • If the time is now, we call it a “cash” contract • If the time is sometime in the future, then it’s a “forward cash” contract

20. Cash Bids Key Coop http://www.keycoop.com/cash-bids Heartland Coop https://myaccount.heartlandcoop.com/bids.htm Cargill http://www.cargillag.com/Marketing/LocalBids/local-bids-center West Central Coop http://www.west-central.com/grain/west-central-bids/default.aspx

21. The Highest Cash Price Is … … Not always the highest return Need to think about transportation and storage costs Compare the cash prices we’ve seen today: • If storage is costing me 3 cents/bushel/month, do the May bids look better than the current cash price? • If transportation is costing me 0.5 cents/bushel/mile, which is the better price? Boone (16 miles) Gilbert (8 miles) Nevada (10 miles) Alleman (16 miles) Eddyville (100 miles)

22. Cash vs. Futures Hedge • Cash Sales • Locks in full price and delivery terms • No margin requirements • Futures Hedge • Locks in futures price, but leaves basis open • Could see price improvement/loss • Can be easily offset if problems arise

23. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2014/ Have a great Super Bowl weekend!