Grain Marketing in the Bio. Fuels Era: Session 1: January 22 Ethanol
Massive Demand Growth
Nearly Unlimited Fuel Usage U. S. Gasoline use is about 140 billion gallons per year. All our corn crop would only provide 14% of the energy in gasoline.
Markets Must Find Balance Between FOOD FUEL
Rebalancing Includes • Input supplies usage • Acreage in production • Specialization in certain crops • Technology used • Crops grown • Crop prices • Domestic vs. Export Markets • The way livestock are fed • Consumer demand for food products Inputs Sector Farm Level Response Demand Structure Consumer Impacts Linkage Adjustments
How Bio. Fuels Era Impacts Prices and Marketing Level of crop prices rise Relationship of crop prices change Volatility of crop prices increases Government programs: Limited importance Risk Exposure--$ of Exposure grow Cyclical Uncertainties as Boom/Bust Odds Grow Coordination of linkage between growers and end users
Government Support-Bear Strategy 1. 2. 3. 4. Price early (spring) LDP at harvest Store Earn carry in the market Government Support Line Opportunity
1. 2. 3. 4. Market Opportunity-Bull Strategy Price later (wait for a big event) No government programs Consider selling at harvest-replace with long futures/calls Smaller returns for storage Opportunity Government Support Line
Your Course Includes: Each Monday Night Jan 22, Jan 29, Feb 5, Feb 12 • About 1/3 of course is: • Bio. Fuels Era Marketing and Outlook • Changes in market relationships • About 2/3 of the course will be: • Learning about marketing decisions: – – – Futures, Options, Basis Storage Pricing Alternatives Seasonality Price Forecasting Strategies and planning
Introduction to the mechanics of futures markets (CMS Disk 1, Unit 2, module 3 a)
What are Commodity Futures Contracts?
Futures Contracts Definition: A commodity futures contract is a legal instrument calling for the holder of the contract to deliver or to accept delivery of a commodity on or by some future date.
Two Distinct Markets! Futures Market Cash Market
Futures Contract Jargon Sell Short: means the contract holder has a legal Short obligation to make delivery of the commodity. Buy Long: means the contract holder has a legal Long obligation to accept delivery. Round Turn: is the completion of a “sell and buy Turn back” or of a “buy and then sell” set of transactions
Futures Contracts • Commitment to Accept or to Make delivery of a commodity with the following specifications: • Grade • Quantity • Delivery Location • Delivery Time • Each commodity contract is standardized with these four items determined…. the only variable to discover is price.
Example: No. 2 Soybean Futures Size Tick Size Daily Limit Contract Months 5, 000 bu ¼¢ /bu 50¢ /bu Jan, Mar, May, Jul, Aug, Sep, Nov Last Trading Day The business day prior to the 15 th of the month
Contracts Change Value as Prices Change March 20: 5, 000 bu of July corn futures @ $2. 50 = $12, 500 March 25: 5, 000 bu of July corn futures @ $2. 60 = $13, 000 10 cent change in price = $500 change in one contract Change in Value for: Buyer = +$500 Seller = -$500
Margin can be thought of as a performance bond—a deposit of cash that shows each trader acknowledges their responsibility when trading on the exchange. Two types of margin are: Initial Margin and Maintenance Margin.
Initial Margin is the amount the trader must deposit to enter a futures contract. The initial margin is kept in the margin account. – The exchange sets initial margin based on volatility of the market. – Historically, initial margin seldom exceeds 5% of the face value of the contract. – Brokerage firms can choose to charge more than the minimum level of margin.
Maintenance Margin • Maintenance Margin is the minimum level at which the account must be maintained. It becomes a threshold for the “margin call” when the position is losing money. • The margin call is a request for additional money to restore the margin account to its initial level. In general, margin calls are initiated when the margin account is about 2/3 of its original value. – Margin calls must be handled in 24 to 72 hours, depending on the broker’s business practice. If margin calls are not met, the position can be liquidated.
Futures Positions Require Margin Money Margin means you do not have to pay the full value of your futures position…. JUST a MARGIN A small amount of Your $ $4 corn example $1, 000 Controls a LARGE amount of Commodity Value $20, 000
Margin Key Concept If you trade futures contracts, you must be prepared to meet margin calls!
Using Futures Contracts (CMS Disk 1, Unit 2, module 4 a)
Objectives • Understand the many uses of futures contracts • Define the concept of hedging • Show futures contracts can be used to establish prices for a growing crop • Show futures can be used to establish a favorable storage return
How Do Farmers Use Futures in Their Marketing? • To forecast prices • To establish prices of growing crops or livestock • To establish feed prices or other input prices • To gain a return to storage • To speculate on paper rather than with inventory
Futures Prices as a Forecast Buyers and sellers formulate an ask and bid price based on their expectations of supply and demand. When an ask or bid price is accepted, the market has reached an agreement about the future value of the commodity. In essence, the futures price is a market determined forecast. However, while futures prices may be a good estimate of future prices today, do not assume that prices will be at the same level when the contract matures. Remember, new information will cause prices to change.
Futures Prices as Forecast March Futures July Futures Corn $2. 50 $2. 75 Soybeans $8. 25 $7. 75 The corn futures market is suggesting that prices will move higher into July. This gives a stronger incentive to store. On the other hand, soybean futures suggest prices will fall. So, consider selling now rather than continuing to store.
Futures Prices as Forecast How L Shou ong ld Yo Store u ? Dec/Nov Futures March Futures May Futures July Futures Corn $2. 40 $2. 55 $2. 60 Soybeans $6. 10 $6. 30 $6. 35 The final answer is more complicated, but the futures market shows corn storage might make sense to May. On the other hand, soybean futures suggest prices may not increase much after March.
Futures Prices as Forecast Say it’s fall and you have to make a decision about how many acres of wheat to plant for next year and… Next year’s futures prices are: July wheat futures $3. 70 November soybean futures $6. 30 December corn futures Note: These months are the most common to use when considering new crop $3. 25 Of course, which crops to plant next year is a complex decision, but futures markets are hinting that both wheat and corn are expected to be more favorable compared to soybeans.
Key Points • Futures prices are determined by buyers and sellers armed with information. • Futures prices are forecasts made by the market. • Futures prices can be a useful (but not perfect) decision tool.
Discussion Topic • Let’s look at futures prices and discuss what information it’s providing about the future for: • Corn • Soybeans • Crude Oil • Unleaded gasoline • Interest rates
Futures Hedging: Establishing Forward Prices: Hedging Short (Selling) Hedge: 1. Forward Pricing a Growing Crop 2. Establishing favorable returns to storage Long (Buying) Hedge: 1. Establishing price on corn feed needs for a livestock business
Price Risk • Prices are volatile – today’s price (at planting) is not likely to be tomorrow’s price (at harvest). • Futures market positions will allow us to balance the losses for cash commodities with futures contract gains. (Hedging!) • But, the futures market position will also limit our ability to take advantage of higher futures prices.
Hedging Ø The goal of hedging is to reduce risk associated with the cash market through the use of futures market transactions Ø Hedges are used to: Ø Establish the price for a crop Ø Establish the cost of an input like corn feeding needs Ø Protect the value of inventory like stored crops Ø Hedging may be accomplished with futures contracts or futures options contracts
How to Hedge with Futures • When hedging, the futures market position hedging taken today is a temporary substitute for a transaction that will occur later in the cash market. • End Result—Losses in the cash market are offset by gains in the futures market.
Why Hedging Works • The cash and futures markets are different but closely related markets • The cash and futures prices typically move together Prices Futures Cash Time
What is Basis? Cash Price - Futures Price BASIS
Establishing Prices on a Growing Crop 1. (Decision Time) When hedging with futures, you would sell a new crop futures contract. This takes the place of a cash sale to be transacted in later months. 2. When you are ready to sell your cash crop at the elevator you would lift the hedge or liquidate it by a. Selling cash grain to the elevator, and b. Buying back or liquidating the futures contract
Establishing Prices on Growing Crop (continued) 3. The price you receive for your grain is therefore: 4. The cash price for the grain at the elevator 5. Plus or minus 6. The gain or the loss on the futures contract 4. A hedge diagram is used to illustrate positions for the cash and futures markets.
Establishing Price Begin Here Cash Futures Basis May 20 Expect cash value to be $2. 50/bu Sell 5, 000 bu of Expect Basis to Dec corn futures be 20 cents @ $2. 70 under futures Oct 20 Sell corn at elevator for $2. 00/bu Buy back Dec futures @ $2. 20/bu Summary Sold cash @ $2. 00 Gain in futures is +$0. 50 Net Price Received = $2. 50/bu (before any futures commission or hedging costs) Basis is 20 cents under futures They reached their goal of pricing 5, 000 bu of corn at $2. 50/bu. The decline in the cash price was exactly offset by a decline in futures.
What If Prices Moved Upward? Cash Futures Basis May 20 Expect cash value to be $2. 50/bu Sell 5, 000 bu of Expect Basis to Dec corn futures be 20 cents @ $2. 70 under futures Oct 20 Sell corn at elevator for $3. 20/bu Buy back Dec futures @ $3. 40/bu Summary Sold cash @ Loss in futures is ? ______________ Net Price Received = ________/bu (before any futures commission or hedging costs) Basis is 20 cents under futures
The Answer: Cash Futures Basis May 20 Expect cash value to be $2. 50/bu Sell 5, 000 bu of Expect Basis to Dec corn futures be 20 cents @ $2. 70 under futures Oct 20 Sell corn at elevator for $3. 20/bu Buy back Dec futures @ $3. 40/bu Summary Sold cash @ $3. 20 Loss in futures is -$0. 70 Net Price Received = $2. 50/bu (before any futures commission or hedging costs) Basis is 20 cents under futures They reached their goal of pricing 5, 000 bu of corn at $2. 50/bu. The increase in the cash price was exactly offset by a increase in futures.
Example of Basis Speculation Cash Futures Basis May 20 Expect cash value to be $2. 50/bu Sell 5, 000 bu of Expect Basis to Dec corn futures be 20 cents @ $2. 70 under futures Oct 20 Sell corn at elevator for $2. 08/bu Buy back Dec futures @ $2. 20/bu Summary What’s Different? Sold cash @ $2. 08 Gain in futures is +$0. 50 Net Price Received = $2. 58/bu (before any futures commission or hedging costs) Basis is 12 cents under futures They exceed their goal of pricing 5, 000 bu of corn at $2. 50/bu and net $2. 58. WHY? Because on Oct. 20, the cash price was 12 under, rather than the expected 20 under.
Hedging and Basis Risk • Basis influences the effectiveness of the hedge • Hedging is effective in reducing price risk because changes in basis, over time, are much smaller and more predictable than changes in price. • Basis risk is less than price risk.
Price vs. Basis
Establishing Price: Current Example Cash Futures Basis Jan 8, 2007 Expect cash value to be $3. 44/bu Sell 5, 000 bu of Dec 07 corn futures @ $3. 64 Expect Basis to be 20 cents under futures? ? ? Oct 20, 2007 Sell corn at elevator for $3. 00/bu Buy back Dec futures @ $3. 20/bu Basis is 20 cents under futures Summary Sold cash @ $3. 00 Gain in futures is +$0. 44 Net Price Received = $3. 44/bu (before any futures commission or hedging costs) They reached their goal of pricing 5, 000 bu of corn at $3. 44/bu. The decline in the cash price was exactly offset by a decline in futures.
Establishing Price: Current Example Cash Futures Basis Jan 8, 2007 Expect cash value to be $6. 95/bu Sell 5, 000 bu of Nov 07 soybean futures @ $7. 25 Expect Basis to be 30 cents under futures? ? ? Oct 20, 2007 Sell beans at elevator for $7. 10/bu Buy back Nov futures @ $7. 40/bu Basis is 30 cents under futures Summary Sold cash @ $7. 10 Loss in futures is -$0. 15 Net Price Received = $6. 95/bu (before any futures commission or hedging costs) They reached their goal of pricing 5, 000 bu of soybeans at $6. 95/bu. The decline in the cash price was exactly offset by a decline in futures.
Hedges “Lock In” the FUTURES Price • Actual price will depend on actual final basis when hedge is liquidated and converted into a cash position • In session 3 we will discuss basis in more detail
Storage Hedge (CMS Disk 1, Unit 2, module 4 b)
Objectives • Examine Post Harvest Marketing Decisions • Understand the Components of Storage Costs • Examine a Post Harvest Marketing Alternative (Selling Futures = Storage Hedge) • Understand the Advantages & Disadvantages of the Storage Hedge
A Harvest Decision • Producer Alternatives: – sell at harvest, – store until April (unpriced), – store until April (forward contract), or – store until April (futures hedge).
Current Elevator Bids Harvest (Nov 07) Bid: $3. 30 April 08 Bid: $3. 65 Should we forward contract for April delivery? What is the mathematical difference between the harvest price and the April Bid? Realized Price = April Bid – Storage Costs
Using Basis: Storage Pricing • Quick Hit: Storage Costs On-Farm vs. Commercial • Variable Storage Costs (per bushel): Direct Costs: Utilities, Pesticide, Shrink, etc. Interest Expense or Opportunity Cost: Annual interest rate * Harvest Cash Price/12 * # Hedge Months
Example: Elevator Bids Harvest Bid: $3. 30 April 08 Bid: $3. 65 Should we forward contract for April delivery? Storage Costs: Direct Charges $0. 05 Opportunity Cost $0. 10 Realized Price = April Bid – Storage Costs
Storage Decision • Harvest Bid • Forward Contract = $3. 30 = $3. 65 • What if we use a storage hedge? • What if we store unpriced?
Storage: Futures Information CONTRACT MONTH PRICE/BU. July 2007 $3. 78 September 2007 $3. 66 December 2007 $3. 60 March 2008 $3. 69 May 2008 $3. 75 Inverse Carry
Storage Hedge Date Cash Market Futures Market Basis Initiate Hedge Expects $3. 65/bu net Sell May Futr @ $3. 75/bu Expected to be $0. 10 under Lift Hedge Sell cash @ $3. 20/bu Buy May Futr @ $3. 25/bu Basis is $0. 05 under Hedge Summary Cash Price = $3. 20 Futures Gain = +$0. 50 Net Price = $3. 70 Storage Summary Corn Price Gain = $0. 40 Cost of Storage = -$0. 15 Net Return to Storage = $0. 25
Pricing Basis: Storage Decision Action Advantage $$ Now! Simple Sell @ Harvest No more risk No storage costs Forward Price Lock-in Price No Basis Risk Disadvantage No Upside: Cannot Capture Futures Carry or Basis Appreciation No Upside No Basis Appreciation Basis Risk Futures Hedge Flexible-Choose elevator No Upside Storage All Upside Potential All Downside Potential Speculation
Long (Buying) Hedge Situation: Livestock feeder needs to purchase today (Jan 22) 20, 000 bushel of corn for May 1 st delivery. Expected purchase basis is 10 cents over May futures. Date Cash Market Futures Market Basis Jan 22, 2007 Expects $3. 85/bu net purchase Buy 20, 000 May Futr @ $3. 75/bu Expected to be $0. 10 over May 1, 2007 Buy cash @ $3. 30/bu Sell May Futr @ $3. 25/bu Basis is $0. 05 over Hedge Summary Cash Price = $3. 30 Futures Loss = +$0. 50 Net Price = $3. 80 Net price of $3. 80 was $. 05 better than expected because the basis was $. 05 more favorable
Readings for Jan th 29 on Options • In Agricultural Futures and Options: A Hedger’s Self-Study Guide – p. 21 -32 – p. 49 -58 – Useful glossary of terms p. 63 -64
Assignments 1. Hedging Exercise completed 2. Basis Exercise 3. Go to www. gptc. com , then double click “Charts & Quotes”, then double click on “Corn” then double click on “May 07” What direction are May corn futures headed? 4. Go to www. incorn. org , then to “Local Cash Grain Bids”, put in zip code, ask for up to 5 markets in your local area. Once bids come up try clicking on the number for your corn basis and you should get a basis chart
Скачать презентацию Grain Marketing in the Bio Fuels Era Session
72ef9df4116085a332304da33d3614ef.ppt