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AGEC 420

AGEC 420. Markets TradeSim rankings Storage assignment due Wed – Guest Speaker – Dr. Mintert April 4 – White Commercial, 5pm, WA 328 Today – Currency hedge Soybean Comlex. Open Position - MidAm Corn. Bot 1 MidAm Dec Corn @ 2.29¼, March 6 Close $ +/- Fri., Mar 22 2.25 ½ -$40.00

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AGEC 420

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  1. AGEC 420 • Markets • TradeSim rankings • Storage assignment due • Wed – Guest Speaker – Dr. Mintert • April 4 – White Commercial, 5pm, WA 328 • Today – • Currency hedge • Soybean Comlex

  2. Open Position - MidAm Corn • Bot 1 MidAm Dec Corn @ 2.29¼, March 6 Close$ +/- Fri., Mar 22 2.25 ½ -$40.00 http://www.cbot.com/cbot/charts/detail/0,1551,13+44+120+C+Z2+1+1,00.html Cattle: http://futures.tradingcharts.com/chart/LC/42

  3. Currency Hedge Scenario: US Meat company exporting to a Japanese wholesaler. Delivery and payment will be in June US firm wants to get paid in $ Japanese firm wants to pay in Yen --> someone will face currency risk

  4. Currency Hedge (cont.) With payment in Yen, U.S. firm faces risk March 25: Negotiated price is $50,000 at today’s exchange rate (ER) of $0.80/100Y => payment of 6,250,000Y in June

  5. Currency Risk In June, Yen may be worth less at $0.75/100Y, 6.25mill Yen = $46,875 => if the Yen drops, US company looses. To hedge against this risk? => sell the yen futures contract for June

  6. The Soybean Complex Soybeans: 5,000 bu. contract; Quoted as $/bu May @ 5164  $5.16½ /bu (min tick = ¼ c) One bushel (60 lbs) of beans yields: • 11 lbs Soybean Oil: • 48 lbs Soybean Meal:

  7. Soybean Oil and Meal Soybean Oil 60,000 lb contract Quoted as c/lb May @ 1623  16.23c/lb (min tick is .01c) Soybean Meal 100 ton contract [1 ton = 2000 lb] Quoted as $/ton May @ 1682  $168.20/ton (min tick is 10c)

  8. Soybean Processor Gross margin = Revenue - Costs On a per bushel basis: Revenue = Qoil*Poil + Qmeal* Pmeal

  9. Revenue from Oil & Meal Oil Revenue Per Bushel of Beans = 11 lbs oil/bu * Poil/lb Meal Revenue Per Bushel of Beans = 48 lbs meal/bu * Pmeal/ton / 2000 lbs/ton

  10. Gross Margin per Bushel Revenue = Qoil*Poil + Qmeal* Pmeal = 11* Poil + 48* Pmeal /2000 = 11* Poil + 48/2000* Pmeal Cost = Pbeans

  11. Gross margin - example Yesterdays prices for May contracts: • Soybeans -- $5.15(screen quote is 5150) • Soybean Oil -- 16.37 c/lb (quoted as 1637) • oil revenue per bushel = 11*(16.37) = $1.80 • Soybean Meal -- 166.90 $/ton (quoted as 1669) • meal revenue = 48/2000*(166.90) = $4.01

  12. Gross margin - example • Total Revenue • $1.80 + $4.01 = $5.81 • Total Cost • $5.15 • Gross margin = $0.66

  13. Gross margin – May 1999 Using prices for May 1999 contracts: • Soybeans = $4.99 • Soybean Oil -- 19.58 c/lb • oil revenue per bushel = 11*(19.58) = $2.15 • Soybean Meal -- 136.10 $/ton • meal revenue = 48/2000*(136.10) = $3.27

  14. Gross margin – May 1999 • Total Revenue • $2.15 + $3.27 = $5.42 • Total Cost • $4.99 • Gross margin = $0.43

  15. 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”)

  16. 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

  17. Crush Spread - example Buy May beans @ $4.99; Sell May oil @ 19.58; Sell May meal at 136.10 Exercise: Setting basis = zero, find the actual margin if May prices are: a) beans @ 5.23; oil @ 19.60; meal @ 137.00 b) beans @ 4.75; oil @ 19.56; meal @ 135.20

  18. Crush Spread • How many contracts of each? • If you use 1:1:1 of Beans:Oil:Meal, are you adequately covered? • What is the correct ratio? • See handout on ‘Soybean Crush’ – on webpage

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