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Econ. 338C: Overview of Grain Marketing

Econ. 338C: Overview of Grain Marketing. Spring 2007. Dr. Robert Wisner, University Professor Iowa State University. Half-semester Marketing Exercise. On Wednesdays, record prices Calculate basis for each location Create a basis chart Analyze the results Watch for strength at one or

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Econ. 338C: Overview of Grain Marketing

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  1. Econ. 338C: Overview of Grain Marketing Spring 2007 Dr. Robert Wisner, University Professor Iowa State University

  2. Half-semester Marketing Exercise • On Wednesdays, record prices • Calculate basis for each location • Create a basis chart • Analyze the results • Watch for strength at one or more locations • For 2 farms 5 mi. N & 8 mi. Sw of Ames, determine which is the best market each week. • Does best market shift from week to week? • The farms have access to semi trucks & cost per bushel is $0.0047 per mile for distances up to 30 miles & $0.0028 for distances of 60 to 100 miles. • Are non-price considerations important in selecting a market? • Show results & Write a short report on findings, by April 26

  3. The Market’s Job: Transfering Raw Products to Consumer Products Major Marketing Functions Providing time utility Providing form utility Providing space utility Financing Price/value discovery

  4. Market Participants Grain Producers Elevators Railroads, trucking & barge companies Banks & insurance cos. Futures market traders & brokers Processors Feed Mills Ocean shipping firms

  5. Key work areas for Grain Merchandisers *Arbitrage = Maximizing return over time & space *Maximizing returns for available storage *Utilizing transportation equipment efficiently * Choices heavily influenced by futures

  6. Corn March $4.132 May 4.24 July 4.32 Sept. 4.18 Dec. 4.08 May ‘08 4.18 July 4.23 Dec. ’09 3.70 Soybeans March $7.34 May 7.48 July 7.64 Sept. 7.75 Nov. 7.87 May ‘08 7.97 July 8.03 Nov. ’09 7.48 Futures prices 3/7/07Implications?

  7. Corn July $2.54 Sept. 2.61 Dec. 2.77 March’07 2.88 May 2.97 July 3.03 Soybeans July $6.02 Aug. 6.03 Sept. 6.11 Nov. 6.25 Jan. ’07 6.37 March ‘07 6.46 Futures prices 7/14/06 What were the markets telling farmers? Other needed information?

  8. Geographical Corn Price Differences Early March 2007 5.13 3.82 3.82 3.89 4.04 3.99 4.05 4.34 4.56 4.20 4.11 5.30 4.06 White 5.08 4.22 4.24 4.22 4.11 3.83 Wheat 4.44 4.66 4.43 4.52

  9. Econ. 338 C: Spring 2003 Overview of Grain Marketing , cont. • All Activities from production to final user = Marketing • First receivers of grain-- elevators, processors, feedlots • Pricing the grain to farmers • Offering contracts • Merchandising: finding greatest value for the grain • Economics of transportation • Utilizing space efficiently • Segregating: specialty crops, non-GMO

  10. Countries requiring GMO labeling Brazil Hungary Philippines U.K. Greece Italy Belgium Portugal S. Korea France Spain Japan Netherlands Sweden Czech Rep. Germany Finland Hungary Luxembourg Austria Saudi Arabia Switzerland Poland Japan Denmark Australia Mexico Ireland New Zealand Russia Paraguay China Ethiopia Slovenia Thailand South Africa Sri Lanka Latvia, Estonia, Slovakia Lithuania Taiwan Malaysia

  11. From BNSF Econ. 338C: Overview of Grain U.S. & Global Marketing

  12. Overview of Grain Marketing, cont. • First receivers of grain-- Continued • Grading grain: Official & unofficial grades • Grading standards: BCFM, Test Wt., Damage, soybeans include splits, foreign material • Risk-management: hedging, using options • Quality control and management *** • Processors--soybeans • Managing & protecting processing margins: • hedging the crush, reverse crush positions • Merchandising products • Sourcing the soybeans

  13. Calculating Soybean Crush Margins 3/01/2007 3/02/06 Soybean oil price$/lb. 0.2889 0.2450 Oil yield, lbs./Bu. 11.26 11.59 Oil value,$/Bu. 3.25 2.84 Soybean meal price, $/ton 209.60 176.10 Meal yield, lbs./Bu. 44.09 44.08 Meal value,$/Bu. 4.62 3.88 Total value from products 7.87 6. 72 Bean price, C. Illinois 7.30 5.83 Gross Crush Margin 0.58 0.90

  14. Overview of Grain Marketing, cont. II • Processors--Corn (ethanol, fructose, other) • Can’t hedge margins, may protect via. forward contracts with users • Sourcing the corn & contracting with farmers • Quality control • Dynamic industry • About 350 new plants are being planed • Big firms: Cargill & ADM (wet milling) vs. dry milling: Distillers grain & solubles vs. corn gluten feed & corn gluten meal) • Avoid EU unapproved GMO corn

  15. Iowa Corn Processing Plants Annual Capacity Operating Plants 970 mil. bu. Expanding Plants 282 New, Under Construction 198 Planned 1,364 Potential total rated capacity 2,814 mil. bu. Equals 137% of 2006 Iowa Corn Crop 1/29/07

  16. 71 Potential Iowa Plants 11 Just across IA Borders Capacity: 137% of 2006 Crop Iowa Corn Processing Plants, Current & Planned, 2/16/07

  17. * * *Needed corn Acres @ 188 bu./A. state avg. in 2010

  18. Needed Yld. @ current Acres

  19. NCGA Yield Contest 1996-2006, Irrigated and Non-Irrigated Winners, Outliers Removed Source: Dr. Roger Elmore, ISU Agronomy Dept.

  20. Figure 2. 8/30/06

  21. 5.5 Bil. Bu for ethanol

  22. Illinois Corn Yields Drought Tolerant? % chg. 2004 2005 - 24 • NW 184 140 • NE 174 129 - 26 • WEST 192 141 - 27 • E.SE. 175 139 - 21 • SW 158 133 - 16 • SE 158 130 - 18 Crop Reporting Distr.

  23. March Crude Oil Futures 2/16/07

  24. Mar. N.Y. Gasoline Futures 2/16/07

  25. Feb. Ethanol Futures 2/16/07

  26. State Average Ethanol Rack Prices Averages provided by: 

  27. Ethanol Economics • $0.10 increase in ethanol price raises break-even Corn price $0.28/bu. • $1.00 rise in corn price increases cost/gal. $0.36 • Ethanol prod’n cost $1.30/gal. (Minnesota- @$2 corn) • Cost increases about $0.36/gal. for each $1 increase in corn • 1/29/07 ethanol price: $1.91/gal. • December 06 margins: $0.64/gal. (incl.$.51credit) • 1/29/07: Drops to zero @ corn price of about$3.70 corn in IA($4.10 with USDA costs) 2/20: $4.40-4.80 • Other variables: DDGS price, Natural Gas

  28. Late Dec. ‘06 1/29/07

  29. High Prices are best cure for high prices

  30. U.S. Corn Acres Needed, 2007? • Production deficit: 2006 = 1,300 mil. Bu. • New ethanol demand (45-50% of current construction): 950-1,060 mil. Bu. • Export + feed shrinkage: 350-400 mil. Bu.? • Total short-fall: 1,850 to 1,960 mil. Bu. • Potential carryover decrease, ’07-08: 0.0 • Needed extra harv. acres: 11.6-12.3 Mil. A. @ 160 Bu./A. on all acres (U.S. harv. A. +13% to +14%) • Still Leaves Potential Very Tight Supply With Excellent Weather

  31. Basis for Corn, Iowa Counties Late January to late February, 2005 Corn Basis (cents/bu) under near-by futures -36.0 to -30.2 -30.2 to -28.7 -28.7 to -25.0 -25.0 to -21.6 Notes: Underlined data indicates that no data were available; averages for surrounding counties are reported. -21.6 to -17.4 -17.4 to 0.0

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