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AGEC 420

AGEC 420. Markets, TradeSim April 4 – White Commercial, 5pm, WA 328 Soybean Crush Fundamental analysis Quiz. Open Position - Corn. Bot 1 MidAm Dec Corn @ 2.29¼, March 6 Close ? $ +/- Mon., Mar 28 2.24 ½ -$47.50 CBOT: http://www.cbot.com/

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AGEC 420

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  1. AGEC 420 • Markets, TradeSim • April 4 – White Commercial, 5pm, WA 328 • Soybean Crush • Fundamental analysis • Quiz

  2. Open Position - Corn • Bot 1 MidAm Dec Corn @ 2.29¼, March 6 Close ?$ +/- Mon., Mar 28 2.24 ½ -$47.50 CBOT: http://www.cbot.com/ Cattle: http://futures.tradingcharts.com/chart/LC/42

  3. Soybean Processors risk Pbeans and/or Poil, Pmeal  • Processor can lock in a margin by using a “spread hedge” (often called a “crush spread” or “putting on the crush”)

  4. Putting on the Crush • The simultaneous purchase of soybean futures and sale of soybean meal and soybean oil futures • to lock in the processing margin

  5. Crush Spread • If you use 1:1:1 of Beans:Oil:Meal, are you adequately covered? NO • What is the correct ratio? Beans Oil Meal 10 9 12 • See handout on ‘Soybean Crush’ – on webpage

  6. The Crush Spread • Buy soybean futures and sell soybean meal and soybean oil futures • to lock in the processing margin • or • to bet on a reduction in margin (spec) • Reverse Crush: • A bet on a widening margin: (Sell beans, Buy products)

  7. Soybeans US Production 1997/98 2001/02 Area (m ha): 27.9 29.5 Yield (MT/ha): 2.62 2.66 Prod (MMT): 73.2 78.6 Export (MMT): 23.7 27.7 Av. P ($/MT): 230 153 [36.7 bu per MT]

  8. Soybeans World Production 1997/98 2001/02 United States 46% 43% Brazil 20% 24% Argentina 12% 15% China 9% 8% TOTAL (MMT) 158 184

  9. Soybean Trade US Exports 1997/98 2001/02 US Export (MMT): 23.7 27.7 Exports/Prod %: 32.3% 35.3% % world exports: 59% 47% Importers: EU (35%), China (22%), Japan (8%)

  10. Fundamental Analysis The use of information about supply, demand and other economic factors to forecast price.

  11. Fundamental Analysis Typically involves: a) gathering info on supply and demand • USDA reports, weather, political factors, substitutes b) translating quantity information into a price prediction • regression analysis

  12. Fundamental Analysis • Is it useful or worthwhile for the small hedger or speculator? Purcell, Chapters 3 --> YES Malkiel, Chapters 5 and 7 --> NO

  13. Fundamental Analysis - Livestock Long run: use both Supply and Demand information Short run: use only Supply information Cattle on Feed numbers Weights

  14. Technical Analysis The use of historical market information on prices, price patterns, volume of trade etc to forecast future price movement

  15. Technical Analysis Typically involves use of: • Charts - patterns b) Other mathematical constructs - moving averages, relative strength index

  16. Technical Analysis Is it worthwhile? Purcell, Chapters 4 and 5 --> YES Malkiel, Chapters 5 and 6 --> NO Example: http://commoditytrader.net

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