ECON 337: Agricultural Marketing

1. ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911

2. Old Crop/Livestock Weekly Table

3. New Crop/Livestock Weekly Table

4. Speculators have no use for the physical commodity They buy or sell in an attempt to profit from price movements Add liquidity to the market May be part of the general public, professional traders or investment managers Short-term – “day traders” Long-term – buy or sell and hold Market Participants

5. Corn Futures Trade Source: CFTC

6. Soybean Futures Trade Source: CFTC

7. Live Cattle Futures Trade Source: CFTC

8. Lean Hogs Futures Trade Source: CFTC

9. Bullish Speculator No futures position “Long” futures position No futures position Time Now Later Maturity Buy futures contract Sell contract back “Open” a “long” futures position “Close” the “long” position “Make” a promise “Offset” the promise

10. Going Long Bought April 2013 Lean Hogs @ $88.925 on Jan. 25

11. Bearish Speculator No futures position “Short” futures position No futures position Time Now Later Maturity Sell futures contract Buy contract back “Open” a “short” futures position “Close” the “short” position “Make” a promise “Offset” the promise

12. Going Short Sold April 2013 Live Cattle @ $130.75 on Jan. 25

13. Speculators: Buy or sell in an attempt to profit from favorable price movements Face the risk of losses from unfavorable price movements Do not produce or consume the commodity Benefit the market because they add liquidity Often trade the news of the day Speculators

14. Relatively little capital required Initial margin, margin calls No need to handle commodity (e.g., transportation, storage, cleaning) Easy to speculate on either side of the market (Up or Down) Why Speculators Like Futures Markets

15. Drought conditions are projected for the Corn Belt Reports of a bumper crop in Brazilian soybeans Rumors of foot and mouth disease in the U.S. Inflation is projected to rise How Would You Speculate?

16. Looking for quick within-day price moves Might be “long” today and “short” tomorrow Limit the risk they face by limiting their amount of time in the market Day Traders

17. Going Short Sold April 2013 Live Cattle @ $130.75 on Jan. 25

18. Short Hedge

19. Going Long Bought April 2013 Lean Hogs @ $88.925 on Jan. 25

20. Long Hedge

21. When we talk about a cash contract, it is an agreement between a seller and a buyer covering a quantity and quality of a product to be delivered at a specified location and time for a specific price If the time is now, we call it a “cash” contract If the time is sometime in the future, then it’s a “forward cash” contract Cash Contracts

22. Cash Bids Key Coop, Gilbert http://dtn.keycoop.com/index.cfm?show=11&mid=3&locationID=7 Key Coop, Lincolnway Energy http://dtn.keycoop.com/index.cfm?show=11&mid=3&commodity=LWE Heartland Coop https://myaccount.heartlandcoop.com/bids.htm Cargill http://www.cargillag.com/marketing/localbidscenter.aspx West Central Coop http://www.west-central.com/grain/west-central-bids/default.aspx

23. The Highest Cash Price Is … • … Not always the highest return • Need to think about transportation and storage costs • Compare the cash prices we’ve seen today: • If storage is costing me 3 cents/bushel/month, do the May bids look better than the current cash price? • If transportation is costing me 0.5 cents/bushel/mile, which is the better price? • Boone (16 miles) Gilbert (8 miles) • Nevada (10 miles) Alleman (16 miles) • Eddyville (100 miles)

24. Cash vs. Futures Hedge • Cash Sales • Locks in full price and delivery terms • No margin requirements • Futures Hedge • Locks in futures price, but leaves basis open • Could see price improvement/loss • Can be easily offset if problems arise

25. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2013/ Have a great weekend!