ECON 339 X Agricultural Marketing Chad Hart Assistant

ECON 339 X: Agricultural Marketing Chad Hart Assistant Professor chart@iastate. edu 515 -294 -9911 Econ 339 X, Spring 2011 John Lawrence Professor jdlaw@iastate. edu 515 -294 -7801

Going Short Sold Nov. 2011 Soybeans @ $12. 73, 1/11/11 Futures @ $13. 36 63 cent shift Cash quote for Oct. soybeans from Alleman 1/11/11 $11. 92 1/19/11 $12. 55 63 cent shift Econ 339 X, Spring 2011

Short Hedge Expected Price Ø Expected price = Futures prices when I place the hedge + Expected basis at delivery – Broker commission Ø In my example: Nov. 2011 soybean futures Historical basis for Nov. Commission on trade Expected local hedged price Econ 339 X, Spring 2011 ($ per bushel) 12. 73 -0. 25 -0. 01 12. 47

Short Hedge Margin Example Date Price Gain Margin Call Account Balance $3, 250 1/11/11 $12. 73 1/12/11 $13. 08 -$1, 750 $3, 250 1/13/11 $13. 12 -$200 $3, 250 1/14/11 $13. 23 -$550 $3, 250 1/18/11 $13. 26 -$150 $3, 250 1/19/11 $13. 36 -$500 $3, 250 Overall Econ 339 X, Spring 2011 $3, 150

Going Long Bought Dec. 2011 Corn @ $5. 48, 1/11/11 Futures @ $5. 68 20 cent shift Cash quote for Nov. corn from Alleman 1/11/11 $4. 91 1/19/11 $5. 10 19 cent shift Econ 339 X, Spring 2011

Long Hedge Example Ø Expected price = Futures prices when I place the hedge + Expected basis at delivery + Broker commission Ø In my example: Dec. 2011 corn futures Historical basis for Dec. Commission on trade Expected local net price Econ 339 X, Spring 2011 ($ per bushel) 5. 48 -0. 25 +0. 01 5. 24

Long Hedge Margin Example Date Price 1/11/11 $5. 48 1/12/11 $5. 60 +$600 $2, 100 1/13/11 $5. 70 +$500 $2, 600 1/14/11 $5. 71 +$50 $2, 650 1/18/11 $5. 78 +$350 $3, 000 1/19/11 $5. 68 -$500 $2, 500 Overall Econ 339 X, Spring 2011 Gain Margin Call $0 Account Balance $1, 500

Market Participants Ø Speculators have no use for the physical commodity ØThey buy or sell in an attempt to profit from price movements ØAdd liquidity to the market Ø May be part of the general public, professional traders or investment managers ØShort-term – “day traders” ØLong-term – buy or sell and hold Econ 339 X, Spring 2011

Corn Futures Trade Econ 339 X, Spring 2011 Source: CFTC

Soybean Futures Trade Econ 339 X, Spring 2011 Source: CFTC

Bullish Speculator No futures position “Long” futures position Now Later Buy futures contract Sell contract back “Open” a “long” futures position “Close” the “long” position “Make” a promise “Offset” the promise Econ 339 X, Spring 2011 Time Maturity

Going Long Bought Dec. 2011 Corn @ $5. 48, 1/11/11 Econ 339 X, Spring 2011

Bearish Speculator No futures position “Short” futures position Now Later Sell futures contract Buy contract back “Open” a “short” futures position “Close” the “short” position “Make” a promise “Offset” the promise Econ 339 X, Spring 2011 Time Maturity

Going Short Sold Nov. 2011 Soybeans @ $12. 73, 1/11/11 Econ 339 X, Spring 2011

Speculators Ø Speculators: ØBuy or sell in an attempt to profit from favorable price movements ØFace the risk of losses from unfavorable price movements ØDo not produce or consume the commodity ØBenefit the market because they add liquidity ØOften trade the news of the day Econ 339 X, Spring 2011

Why Speculators Like Futures Markets ØRelatively little capital required ØInitial margin, margin calls ØNo need to handle commodity (e. g. , transportation, storage, cleaning) ØEasy to speculate on either side of the market (Up or Down) Econ 339 X, Spring 2011

How Would You Speculate? Ø Sudden death syndrome in soybeans returns to Iowa for the 2 nd year in a row Ø Reports of a bumper crop in Argentine corn Ø China rumored to be in the market for corn Ø Inflation is projected to rise Econ 339 X, Spring 2011

Day Traders Ø Looking for quick within-day price moves Ø Might be “long” today and “short” tomorrow Ø Limit the risk they face by limiting their amount of time in the market Econ 339 X, Spring 2011

Class web site: http: //www. econ. iastate. edu/~chart/Classes/econ 339/ Spring 2011/ Econ 339 X, Spring 2011