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ECON 339X: Agricultural Marketing

ECON 339X: Agricultural Marketing. Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911. World Ag. Supply and Demand Update Price Issues. Today’s Topic. U.S. Corn Supply and Use. Source: USDA, with my modifications for 2010 acreage.

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ECON 339X: Agricultural Marketing

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  1. ECON 339X: Agricultural Marketing Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

  2. World Ag. Supply and Demand Update Price Issues Today’s Topic

  3. U.S. Corn Supply and Use Source: USDA, with my modifications for 2010 acreage

  4. World Corn Production Source: USDA

  5. U.S. Soybean Supply and Use Source: USDA, with my modifications for 2010 acreage

  6. World Soybean Production Source: USDA

  7. A price pattern that repeats itself with some degree of accuracy year after year. Supplies and demand Often sound reasons Widely known Linked to storage cost or basis patterns in grains Linked to conception and gestation in livestock Seasonal Patterns

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

  9. Charting Channel lines

  10. Sell Signal A sell signal is one close below the charting lines Sell signal

  11. Buy Signal Some chartists need only one close above the charting line to create a buy signal, others use two closes above. Buy signal

  12. Key Reversal A key reversal is when the daily high and low price range exceed the price range for the previous two days.

  13. Gaps Gaps often occur when a major new piece of information hits the market. They are often filled in by later price movements.

  14. Double Tops & Bottoms Double tops and bottoms show prices with major technical resistance. These can be several days apart.

  15. Head & Shoulders Source: Figure 7, Charting Commodity Futures Ag Decision Maker, File A2-20

  16. Moving Averages 9 day average 18 day average 40 day average Sell signal Buy signals

  17. Relative Strength Index • Looks at last X days worth of closing prices • X = 9, 14, 30, etc. • Summarizes upward and downward price movements during the period • Record the last 14 days worth of price changes, based on closing prices • Sum the positive and negative price changes and create average for each • Relative Strength Index = (Up average/(Up average + Down average))*100

  18. Relative Strength Index RSI for July 2010 Corn

  19. Relative Strength Index RSI’s above 70 (80) are considered signals of a market due to decline RSI’s below 30 (20) are considered signals of a market due to rally

  20. Does Technical Analysis Work? Arguments for it: • Real world markets are not perfectly rational • Markets may be slow to respond to new information • Technical analysis works with the psychological biases • It works because so many people use it • Self-fulfilling Arguments against: • Efficient market hypothesis • The current price holds all of the relevant information

  21. Convergence Issues Typically, as futures contracts reach maturity, futures price and cash prices at delivery points tend to converge to the same level. For several grain and oilseed futures contracts over the last few years, this has not occurred. “Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions” • Scott Irwin, Philip Garcia, Darrel Good, and Eugene Kunda • University of Illinois, March 2009

  22. Corn (Lack of) Convergence Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  23. Soybean (Lack of) Convergence Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  24. Wheat (Lack of) Convergence Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  25. Why Is Convergence An Issue? • Non-convergence indicates the market is out-of-balance. “When a contract is out of balance the disadvantaged side ceases trading and the contract disappears.” (Hieronymus, 1977) • Non-convergence adds to the uncertainty in basis and limits hedging effectiveness. Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  26. Factors • The relationship between the spread between futures contracts and the cost of carry (think storage costs) • In the settlement process for corn and soybean futures, the delivery instrument is a shipping certificate. • If it is advantageous to the holder of a shipping certificate, they can delay delivery and effectively store the grain, paying CBOT set storage costs. • Structural issues related to the delivery process • Does the general trade flow of the commodity line up with the possible delivery points under the futures contract? Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  27. Spread vs. Carry Look at the ratio of the futures spread versus the cost of carry Futures PriceNext– Futures PriceNearby Storage Costs + Interest Irwin, et al. found lack of convergence when ratio is high (> 80%) A lower ratio implies smaller returns to holding a shipping certificate and more offsetting positions are taken, lowering futures prices. If the commodity is still in storage, then cash sales aren’t happening, lowering cash prices. Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  28. Delivery Points How much of the commodity is moving through the delivery point areas? Corn Soybeans Wheat Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  29. Convergence vs. Carry - Corn Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  30. Convergence vs. Carry - Soy Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  31. Possible Reasons for High Ratios CBOT storage rates below commercial storage rates Large “long-only” index funds rolling to the next contract at the same time Large risk premiums built into futures to cover uncertainty Irwin, et al. found support for #1 and arguments for #3, but did not find support for #2. Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  32. Possible Remedies • Increase CBOT storage rates • Done for corn and soybeans in late 2008 • Change delivery points to include more of the commodity shipping area • Mostly an issue for wheat Other proposals: • Move to cash settlement • Force delivery • Limit the number of certificates that can be held Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  33. Relative Basis Change - Corn The closer this is to one, the more effective hedging is. Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  34. Relative Basis Change - Soy The closer this is to one, the more effective hedging is. Source: Irwin, Garcia, Good, and Kunda, 2009 Marketing and Outlook Research Report 2009-02

  35. Class web site:http://www.econ.iastate.edu/classes/econ339/hart-lawrence/

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