ECON 337:

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ECON 337 Agricultural Marketing

Chad Hart Associate Professor chart_at_iastate.edu 51
5-294-9911
Lee Schulz Assistant Professor lschulz_at_iastate.edu
515-294-3356
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Soybean Futures

• Form
• 5,000 bushels
• No. 2 Yellow Soybeans (at price), No. 1 Yellow
  soybeans (at 6 cents over price), and No. 3
  Yellow Soybeans (at 6 cents under price)
• Time
• Contract months Sept, Nov, Jan, Mar, May, July,
  and August

Source CME Group
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Soybean Futures
Partial listing of delivery points
Source CME Group Rulebook
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Delivery Points
Corn
Soybeans
Wheat
Source Irwin, Garcia, Good, and Kunda,
2009 Marketing and Outlook Research Report 2009-02
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Futures Contracts

• No physical exchange takes place when the
  contract is traded (no actual commodity moves)
• Payment is based on the price established when
  the contract was initially traded (prices can and
  will change before delivery is taken)
• Deliveries can be made when the contract expires
  or the offsetting futures position must be taken
  to settle up
• Deliveries occur on less than 5 percent of the
  traded contracts

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Market Positions

• You can either buy or sell initially to open a
  position in the futures market
• Make a promise to make or take delivery
• Do the opposite to close the position at a later
  date
• Offset the promise (and no commodity changes
  hands)
• Trader may also hold the position until
  expiration and make or take physical delivery of
  the commodity

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Trading Futures Contracts

• All trades through a licensed broker
• Brokerage house has a seat at the exchange and
  is allowed to trade
• Represented on the floor to exercise trade
• Local broker to initiate transaction and manage
  account with client
• Full service and discount brokers

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CME Group

• http//www.cmegroup.com/
• Open, High, Low, Last Price
• Settlement Price
• Volume
• Open Interest
• Daily Limits

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Terms and Definitions

• Basis
• The difference between the spot or cash price and
  the futures price of the same or a related
  commodity.
• Bear
• Someone that thinks the price will decline
• Bull
• Someone that thinks the price will increase

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Cash vs. Futures Prices
Iowa Corn in 2013
The gap between the lines is the basis.
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2013 Basis for Iowa Corn
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Terms and Definitions

• Clearing House
• The division of the futures exchange through
  which all trades made must be confirmed, matched
  and settled each day until offset or delivered.
• Commission
• For futures contracts, the one-time fee charged
  by a broker to cover the trades you make to open
  and close each position.

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Terms and Definitions

• Long position
• A position in which the trader has bought a
  futures contract that does not offset a
  previously established short position.
• Short position
• A position in which the trader has sold a futures
  contract that does not offset a previously
  established long position.

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Going Short
Sold Dec. 2014 Corn _at_ 4.55
What type of trader (bull or bear) would go short?
What events would send prices in a favorable
direction?
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Going Long
What type of trader (bull or bear) would go long?
Bought Nov. 2014 Soybeans _at_ 11.20
What events would send prices in a favorable
direction?
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Margin Accounts
A margin account is an account that traders
maintain in the market to ensure contract
performance. There are minimum limits on the
size of the account. Crop Trader
Type Initial Maintenance Corn Hedger/Speculator
2,363 1,750 Soybeans Hedger/Speculator 3,915
2,900 Lean Hogs Hedger/Speculator 1,350 1,000
Live Cattle Hedger/Speculator 1,013
750 To trade, you must create a margin account
with at least the Initial amount and maintain
at least the Maintenance amount in the account
at the end of each trading day.
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Margin Calls

• Margin accounts are rebalanced each day
• Depending on the value of futures
• Settlement price
• If your futures are losing value, money is taken
  out of the margin account to cover the loss
• If the account value falls below the
  Maintenance level, you receive a margin call (a
  call to put additional money in your margin
  account) and the balance is brought back up to
  the Initial amount

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Margin Example

• Lets say I went short on Mar. 2014 corn
• 4.345/bushel on Jan. 13
• Along with selling a corn futures contract, I
  have to establish a margin account and deposit
  2,363 in it
• On Jan. 17, the Mar. 2014 corn futures price
  moved to 4.24/bushel
• Since Ill be buying the futures contract later,
  this price move is in my favor

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Margin Example

• I gained 10.5 cents per bushel and since the
  contract is for 5,000 bushels, thats a gain of
  525
• At the end of the day (Jan. 17), 525 is
  deposited into my margin account, raising the
  account balance to 2,888
• Since 2,888 is greater than the Maintenance
  level, I will not receive a margin call

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Margin Example 2

• Lets say, instead of going short, I went long on
  May 2014 corn
• 4.4775/bushel on Dec. 11
• Along with buying a corn futures contract, I have
  to establish a margin account and deposit 2,363
  in it
• On Jan. 17, the May 2014 corn futures price moved
  to 4.3175/bushel
• Since Ill be selling back the futures contract
  later, this price move is not in my favor

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Margin Example 2

• I lost 16 cents per bushel and since the contract
  is for 5,000 bushels, thats a loss of 800
• At the end of the day (Jan. 17), 800 is to be
  taken from my margin account, lowering the
  account balance to 1,563
• Since 1,563 is less than the Maintenance
  level, I will receive a margin call and be asked
  to deposit 800 more into the account or to close
  out the futures position
• The 800 brings the account balance back up to
  the initial requirement

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Margin Example Going Short
Date Price Gain Margin Call Account Balance
1/10/14 4.4075 2,363
1/13/14 4.425 -87.50 2,275.50
1/14/14 4.395 150 2,425.50
1/15/14 4.335 300 2,725.50
1/16/14 4.355 -100 2,625.50
1/17/14 4.3175 187.50 2,813
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Margin Example Going Long
Date Price Gain Margin Call Account Balance
1/10/14 4.4075 2,363
1/13/14 4.425 87.50 2,450.50
1/14/14 4.395 -150 2,300.50
1/15/14 4.335 -300 2,000.50
1/16/14 4.355 100 2,100.50
1/17/14 4.3175 -187.50 1,913
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• Class web site
• http//www.econ.iastate.edu/chart/Classes/econ337
  /Spring2014/
• See you at lab, Heady 68!