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ECON 337: Agricultural Marketing

This course provides an overview of agricultural marketing and the use of futures and options in marketing and risk management decisions. It covers topics such as cash markets, futures markets, price determination and discovery, market activities, and futures market exchanges.

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ECON 337: Agricultural Marketing

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  1. ECON 337: Agricultural Marketing Class Intro and Introduction to Futures

  2. Lee Schulz Associate Professor lschulz@iastate.edu 515-294-3356 Heady 478D Chad Hart Associate Professor chart@iastate.edu 515-294-9911 Heady 478F

  3. Class Time: Tue/Thu 9:30-10:50am Heady 68 Office Hours: By appointment TA: Jiwon Lee Class website: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2019/index.htm

  4. Guidelines and rules: • No cell phone calls or texting in class • Class attendance is highly recommended Course reading and resource materials will be available on class website Grading: • Two exams 40% • Homework assignments and quizzes 30% • Marketing plan project and report 30%

  5. Course objectives: • Understand the use of futures, options, and other tools in marketing and risk management decisions • Understand the use of cash sales and contracts and the role of basis, storage, and transportation in determining prices • Know the various sources of agricultural data information and the roles these data play within the commodity markets • Understand the forces that shape commodity markets and learn about market/price forecasting • Design an integrated production and marketing plan for farms and agribusinesses

  6. 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

  7. 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?

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

  9. Futures Markets A market where contracts for physical commodities are traded, the contracts set the terms of quantity, quality, and delivery • Chicago: Corn, soybeans, cattle, hogs • Along with wheat (soft red), oats, rice • 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

  10. The Cash and Futures Markets Are Related Basis = Cash price – Futures price Rearranging terms: Cash price = Futures price + Basis So national (and international) events can affect local prices

  11. 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

  12. Price Determination and Discovery 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.

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

  14. Futures Markets • Organized and centralized market • Today’s price for products to be delivered in the future • A mechanism of trading promises of future commodity deliveries among traders

  15. Futures and Options • Market tools to help manage (share) price risks • Mechanisms to establish commodity trades among participants at a future time • Available from commodity exchanges / futures markets

  16. Agricultural Futures Markets • Has some unique features due to the nature of agricultural businesses • Supply comes online a few times during the year • So at harvest, supply spikes, then diminishes until the next harvest • Production decisions are based price forecasts • Planting decisions can be made a full year (or more) before the crop price is realized • Users provide year-round demand • Livestock feeding, biofuel production, food demand

  17. Futures Market Exchanges • Competitive markets • Open out-cry and electronic trading • Centralized pricing • Buyers and sellers are both in the market • Relevant information is conveyed through the bids and offers for the trades • Bid = the price at which a trader would buy the commodity • Offer = the price at which a trader would sell the commodity

  18. Futures Market Exchanges • Modern futures market began long ago • 1848 -- Chicago Board of Trade • 1898 -- Chicago Mercantile Exchange • 2007 -- CME Group merged CBOT and CME • Highly regulated markets • Commodity Futures Trading Commission (CFTC)

  19. The View from the Corn Pit Source: M. Spencer Green, AP Photo

  20. Futures trading done live, in the pit, on the trading floors of the CME, NYMEX & CBOT is almost completely over Modern futures traders are trading almost 100% electronic

  21. Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2019/index.htm

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