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ECON 337: Agricultural Marketing

ECON 337: Agricultural Marketing. Chad Hart Assistant Professor chart@iastate.edu 515-294-9911. Chad Hart Assistant Professor chart@iastate.edu 515-294-9911 Heady 468E. Class Time: TR 9:30-10:20am East 119 Lab Time: T 2:10-4:00pm Location announced in class

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ECON 337: Agricultural Marketing

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  1. ECON 337: Agricultural Marketing Chad Hart Assistant Professor chart@iastate.edu 515-294-9911

  2. Chad Hart Assistant Professor chart@iastate.edu 515-294-9911 Heady 468E

  3. Class Time: TR 9:30-10:20am East 119 Lab Time: T 2:10-4:00pm Location announced in class (Usually Heady 68) Office Hours: By appointment Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2012/

  4. Guidelines and rules: • No cell phone calls or texting in class or lab • Lab attendance is required, difficult to reschedule • Class attendance is recommended Course reading and resource materials will be available on-line Grading: • Two exams 40% • Three quizzes 15% • Homework assignments 15% • 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 agribusiness

  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

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

  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 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

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

  14. 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 Futures Markets

  15. 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 Futures and Options

  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. 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) Futures Market Exchanges

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

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