CHOOSING YOUR WEAPONS

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CHOOSING YOUR WEAPONSMARKETING TOOLS
MARKET STRATEGY
BY DAN MANTERNACH FARM JOURNAL, NOV 1998, PG 24
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Commodity Marketing Concepts

• Wk 1 Market Planning
• Wk 2 Cash Marketing
• Wk 3 Futures
• Wk 4 Basis
• Wk 5 Midterm
• Wk 6 Hedging
• Wk 7 Options
• WK 8 MARKET STRATEGIES
• Wk 9 Technical Analysis
• Wk 10 No Class Thanksgiving
• Wk 11 Team Presentations

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Marketing Strategy Learning Objectives
After The Lesson, The Student Will Be Able To

• Indicate The Appropriate PRE-HARVEST Market
  Strategy Based Upon Basis And Futures Prices

• 2. Indicate The Appropriate HARVEST Market
  Strategy Based Upon Basis And Cash Prices

3. Compare Contrast Various Marketing
Alternatives
4
Managing Marketing Risk....
....Is Like Fighting A War On Two Fronts

• 2. Upside Price Risk

• Downside Price Risk

On The Portion Of Production That You Have Not
Priced
(Opportunity Cost) On Production That You Have
Priced.
20-40
PRE-HARVEST Strategies
HARVEST Strategies
5
I. Harvest Strategy Components
Learning Objective
Indicate Appropriate HARVEST Strategy Given Basis
Prices
1
Prices

• A.  _________  Reflect _______________ Supply
  Demand Conditions

International
1. Strong
Shortage Real /Imagined
2. Weak
Plenty Of Grain To Meet Needs
B. ______ Reflect ______ Supply Demand
Conditions
Basis
Local
1. Narrow
Bring Me Your Grain Now
Store Your Grain Till Later
2. Wide
6
I. Harvest Strategy Components
Learning Objective
Indicate Appropriate HARVEST Strategy Given Basis
Prices
1
Futures Prices
2. Weak
1. Strong
Situation Two
Situation Four
2
4
B. Narrow
Local Basis
HBN-FPS
HBN-FPW
Situation One
Situation Three
1
3
A. Wide
HBW-FPS
HBW-FPW
7
Deliver _______, ______ Hedge, Gain Benefit Of
Basis _____________
Learning Objective
Indicate Appropriate HARVEST Strategy Given Basis
Prices
1
1
A. Harvest Situation One
HBW-FPS

• 1. Conditions A. ________ Futures Price (_____)
  _________In ______________ Supply

Strong
Good
International
Shortage
Wide
Ample
B. ____ Basis(____) _____ _______Supply
Local
Bad
2. Strategy
A. __________ Grain
Store
B. ________Price With ________ Futures Captures
____________ In Prices
Hedge
Short
Strength
Later
Lift
Narrowing
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Learning Objective
Indicate Appropriate HARVEST Strategy Given Basis
Prices
1
2
B. Harvest Situation Two
HBN-FPS

• 1. Conditions A. ________ Futures Price (_____)
  _________In ______________ Supply

Strong
Good
International
Deficit
B. ________ Basis(_____) _____ ______Supply
Narrow
Low
Local
Good
2.Strategy
A. Deliver ________ Crop And Take Cash
This Year
B. Hedge __________ Crop With ___________ Futures
To Lock In ______, Doesn't Lock ______
Next Yr
Short
Price
Basis
Contract
C. ____________ Delivery ___________ On ________
Crop Locks In Both Attractive ___________ Price
And _________
Deferred
Next Yr
Futures
Basis
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Learning Objective
Indicate Appropriate HARVEST Strategy Given Basis
Prices
1
3
C. Harvest Situation Three
HBW-FPW

• 1. Conditions A. ______Futures Price (_____)
  _______ ______________ Supply

Ample
Weak
Bad
International
Good
Bad
Local
B. _____ Basis(____) ____ _______Supply
Wide
2. Strategy
Store
A. _________Grain
B. Wait For       (1) ____________ Price To
________       (2) Basis ___________ After
Harvest Pressure Decreases
Futures
Rise
Narrows
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Learning Objective
Indicate Appropriate HARVEST Strategy Given Basis
Prices
1
4
HBN-FPW
D. Harvest Situation Four

• 1. Conditions A. ______Cash Price (_____)
  _______ ______________ Supply

Ample
Weak
Bad
International
B. _______ Basis(_____) ___ ____Supply
Good
Narrow
Low
Local
2. Strategy
Deliver
A. _________ Grain
B. To Lock In Favorable Basis, Use 1. 2.
Deferred Price Agreement
Basis Contract
C. Buy 1.
2. Call Option
Long Futures
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I. Pre-Harvest Strategy Components
Indicate Appropriate Pre-harvest Strategy Given
Basis Prices
Learning Objective
2

• A. Futures Expected Prices For Some Point Time
  In The Future

2. Bearish
1. Bullish
F
F
Expect Prices To Decrease
Expect Prices To Increase
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Price Components
Indicate Appropriate Pre-harvest Strategy Given
Basis Prices
Learning Objective
2

• 2. Basis. Difference Between Futures Price And
  Cash Price

1. Good Basis
2. Bad Basis
GB
BB
Basis Improvement Will Not Cover Storage Cost
Basis Improvement Will Cover Storage Cost
13
Pre-Harvest Strategy Components
Learning Objective
Indicate Appropriate PRE-HARVEST Strategy Given
Basis Prices
2
Local Basis
1. Good
2. Bad
Case 2
Ph2 Fb-gb
Case 3
Ph1 Fb-bb
2. Bearish
BB
GB
Futures Prices
Case 4
Case 1
Ph4 Fb-bb
Ph1 Fb-gb
1. Bullish
BB
GB
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Learning Objective
Indicate Appropriate PRE-HARVEST Strategy Given
Basis Prices
2
Pre-Harvest Case 1
PH1 FB-GB
1. Sell Cash Buy Futures Locks In Basis
Leaves Futures Open
2. Sell Cash And Buy Call Options An Alternative
To Buying Futures
3. Basis Contract Basis Is Fixed, But You Can
Lock In Futures Anytime Prior To Delivery
4. Minimum Price Contract You Fix Basis Buyer
Buys A Put Option For You
5. Courage Call Buy Out-of-the-money Call
Option To Hedge On Way To Strike Price
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Learning Objective
Indicate Appropriate PRE-HARVEST Strategy Given
Basis Prices
2
Pre-Harvest Case 2
PH2 FB-GB
1. Deferred Price Contract Commodity Is
Delivered And Neither Basis Nor Future Price Is
Set Until Later By Producer
2. Courage Call Buy Out-of-the-money Call
Option To Hedge On Way To The Strike Price
3. Do Nothing If It Is Deliberate, It Is A
Legitmate Mkt Plan. If It Is Procrastination Or
Inattention, It Is A Marketing Mistake
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Learning Objective
Indicate Appropriate PRE-HARVEST Strategy Given
Basis Prices
2
Pre-Harvest Case 3
PH1 FB - GB
1. Minimum Price Contract You Fix Basis Buyer
Buys A Put Option For You, Charging You Premium
Plus A Service Charge
2. Cash Forward Contract Stops Basis And Futures
Risk, But Has Storage Cost Until Delivery
3. Cash Sale In Market Eliminates Storage,
Basis, And Futures Risk
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Learning Objective
Indicate Appropriate Pre-harvest Strategy Given
Basis Prices
2
Pre-Harvest Case 4
PH4 FB-BB
1. Offensive Hedge A Hedge Placed Because Obj Is
Hit At Level You Will Stick With, Even If Price
Rallies.
2. Defensive Hedge A Hedge Placed Grudgingly To
Cover Risk Of Even Worse Prices. Can Be Lifted
3. Hedge To Arrive Elev Hedges For You Is
Liable For Margin Calls Which Are Deducted At Mkt
Time. No Effect On Basis Risk
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Learning Objective
Indicate Appropriate PRE-HARVEST Strategy Given
Basis Prices
2
Pre-Harvest Case 4
PH4 FB-BB
4. Buy Put Option Buys You The Right, Not The
Obligation, To A Short Position At A Given Strike
Price. Sets A Floor Price For Futures W/O
Sacrificing Up Side Potential. No Effect On Basis
Risk
5. Write A Covered Call Nets You Current
Premium but Exposes You To Margin Call If Mkt
Reaches Strike Price
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Learning Objective
Compare Contrast Various Marketing Alternatives
3
Criteria
Spot Sale
ContractSale
Futures Hedge
Ag Options
Down Price Protection
High
High
High
High
Up Price Profit
None
None
High
None
Marketing Flexibility
High
Medium
High
None
Easy
Easy
Hard
Medium
Difficulty
Cash _at_ Risk
Margin
Premium
None
None
Margin, Comm
Premium, Comm
Cash Cost
None
None