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Commodity Marketing Activity

Commodity Marketing Activity. Chapter One. Marketing History. Chicago 1840’s - merchants buy corn from farmers 1850’s - merchants buy corn on time contracts (forward contracts) to be delivered at a later date to minimize risk

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Commodity Marketing Activity

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  1. Commodity Marketing Activity Chapter One

  2. Marketing History • Chicago 1840’s - merchants buy corn from farmers • 1850’s - merchants buy corn on time contracts (forward contracts) to be delivered at a later date to minimize risk • Speculators appeared, buying and selling forward contracts, not intending to take delivery of the corn, but make a profit

  3. Marketing History • Forward Contracts were traded on street curbs and in public squares • 1850’s Chicago merchants began trading forward contracts for wheat for eastern millers and exporters • Board of Trade in Chicago had been established in 1848 to promote commerce

  4. Marketing History • 1859 State of Illinois authorized Board to establish quality standards, measure, gauge, weigh, and inspect grain • Trading moved from the street to the Board of Trade • At first, very disorganized: people disappeared before delivery, others couldn’t pay

  5. Marketing History • 1865 Board required a “Margin”, • Margin-standardized contract terms for quantity, quality, delivery procedures, and payment terms • These standardized agreements were called Futures Contracts • Futures: the invisible market . • You must have a buyer and a sellet to have a market • Grain Exchanges formed

  6. Marketing History • Chicago Mercantile Exchange in 1874 (Chicago Produce Exchange) for butter, eggs, poultry, and other farm products • Exchanges continue to evolve as need arises

  7. Marketing History • 1922 Grain Futures Act - regulate trading • 1936 Commodity Exchange Act made it illegal to “fix prices” • 1974 Commodity Futures Trading Act est. the Commodity Futures Trading Commission as the independent federal body that oversees all futures trading in U.S. • Exchanges today page 5

  8. The Participants • Commodity Exchange: place to trade, rules • Clearing House: day-to-day settlement of all accounts, guarantees all contracts • Brokerage House: places orders for contracts for businesses or individuals (commission) • Traders: buys & sells contracts on the exchange floor in open outcry

  9. Traders • Speculator: try to make money buying & selling • Day Trader: close their position before the end of the trading day • Position Trader: take relatively large positions in market and hold their position for a long time • Floor Broker: agent for customers • Hedger: Wants physical possession. Uses futures to offset risk of changing prices in the cash market. Transfer risk to speculators • Seller: has a product for sale

  10. Marketing Choices • Cash Sales: deliver your crop to elevator etc. • Forward Contract: negotiate now for delivery later • Futures Contract: agreement to buy or sell at a date in the future • Hedging: minimize risk in cash market • Options on Futures Contracts: right, but not the obligation to buy or sell a futures contract at a specified price

  11. Hedging • You have wheat • You sell wheat futures contract • If prices fall, you sell your wheat at the lower price, but realize a gain in the futures market • If prices rise, works the opposite way • Price is lock in

  12. Cash Markets • Basis: Cash Price - Futures Price • Ex: $2.40 - $2.60 = -$.20 or 20 cents under • Ex: $2.55 - $2.54 = $.01 or 1 cent over • Deferred Pricing Agreement: deliver commodity, agree to set a price later • Basis Contract: type of Forward Contract, lock in a basis relating to a specified futures contract. • Ex: basis -$.20 Cash = $2.64 at selling time • you will get $2.44

  13. Contract • You are legally obligated with a contract Different perspective Strategy Buyer-strategy is to buy low Seller-strategy is to sell high

  14. Example Layaway > Futures Market I select a product at walmart(a commodity) I agree to put down a certain amt of $ and time to pay to secure the product. (initial margin , $ up front) I set a contract to lock in a price. You can bargain on a commodity contract but not at walmart

  15. Speculators make up 95% of the futures market • A contract has to be 2 sided. • If you are taking the offset position you are the buyer. YOU WILL NEVER BUY W/OUT BEING SATISFIED • If you are a buyer, you can find a product, lock in on price, quality, quantity and delivery. • If the price goes up who is happier! • If the price goes down who is happier?

  16. What is a commodity? Products Corn, cotton, pork, beef, FCOJ (frozen concentrated orange juice) 1 bushel corn = 56 lbs 1 corn contract is 5000 bu The base on futures is set at the end of the day. Prices are posted. Starts at base the next day.

  17. Price Protectors • Transfer risk or lock in a price 3 benefits

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