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Grain Marketing: Creating, Modifying, and Transporting Products

Learn the steps involved in grain marketing, the market players, price determination and discovery, cash and futures markets, and other market activities.

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Grain Marketing: Creating, Modifying, and Transporting Products

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  1. ECON 338C: Topics in Grain Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

  2. Marketing A series of events and services to create, modify, and transport a product from initial creation to consumption • Possible steps: • Planning • Production • Inspection • Transport • Storage • Processing • Sale • Market players: • Producers • Elevators • Processors • Transport companies • Banks/Insurance companies • Traders • Feeders

  3. Market Functions Where do you want it? • Location • Time • Form • Price discovery When do you want it? How do you want it? What will you pay for it?

  4. Price Determination is the broad forces of supply and demand establishing a market clearing price for a commodity. Price Discovery is the process by which buyers and sellers arrive at a specific price for a given lotof produce at a given locationfor a specifictimeperiod. Price Determination and Discovery

  5. Price Determination and Price Discovery S P Pe D Q Qe

  6. A human process, subject to relative bargaining power of the buyer and seller. Two stage process Evaluate supply & demand Estimate the price for the specific trade Price Discovery

  7. Cash Markets A market where physical commodities are traded • Local elevators • Ethanol plants & soybean crushers • River terminals • Feeders/feed mills

  8. Futures Markets A market where contracts for physical commodities are traded, the contracts set the terms of quantity, quality, and delivery • Chicago: Corn, soybeans, wheat (soft red), oats, rice • Along with the livestock complex • Kansas City: Wheat (hard red winter) • Minneapolis: Wheat (hard red spring) • Tokyo: Corn, soybeans, coffee, sugar • Has a market for Non-GMO soybeans • Other markets in Argentina, Brazil, China, and Europe

  9. Market Activities • Pricing the commodity • Establishing contracts • Merchandising the commodity among uses • Transporting the products • Storing the products • Managing and controlling the products • Managing production and price risks

  10. Soybean Crush Prices based on July futures, 3/11/09

  11. U.S. Corn Supply and Use Source: USDA

  12. U.S. Soybean Supply and Use Source: USDA

  13. Outside Influences (Jan. 2007 = 1)

  14. Outside Influences (Sept. 2008 = 1)

  15. Ethanol Margins Source: ISU, CARD

  16. Renewable Fuels Standard (RFS)

  17. Harvest Futures Source: CBOT

  18. Input Costs Source: USDA, Agricultural Prices, Feb. 2009

  19. Iowa Corn Prices vs. Costs Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

  20. Estimates for 2009 Iowa Costs December 2009 Corn Futures = $3.96 (3/11/09) November 2009 Soy Futures = $8.17 (3/11/09) Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

  21. Estimated 2009 Iowa Corn Costs Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

  22. Estimated 2009 Iowa Corn Costs Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

  23. Estimated 2009 Iowa Corn Costs Short run, need to cover cash flow costs Seed, fertilizer, chemicals, rent, insurance, etc. Cash flow costs vary by structure Cash renter, Share renter, Owner Farmer choices: Fertilizer, crop insurance Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

  24. Seasonal Pricing Patterns Source: USDA, NASS, Monthly Price Data 1980-2008

  25. Spread is the difference between futures prices Basis = Cash price – Futures price Rearranging terms: Cash price = Futures price + Basis A Few Definitions and Relationships

  26. Corn Futures Spread indicates the market’s willingness to pay for storage Spread = 18.75 cents Source: CBOT, 3/10/09

  27. Soybean Futures Spread = -23.5 cents What is the signal the market is sending? This is called an inverted market. Source: CBOT, 3/10/09

  28. Historical Basis for Iowa Factors that affect basis: Transportation costs Storage and interest costs Local supply and demand

  29. Basis

  30. Class web site:http://www.econ.iastate.edu/classes/econ338C/Hart/Have a great Spring Break!

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