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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Futures Markets

• Organized and centralized market
• Todays price for products to be delivered in the
  future
• A mechanism of trading promises of future
  commodity deliveries among traders

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Futures and Options

• Market tools to help manage (share) price risks
• Mechanisms to establish commodity trades among
  participants at a future time
• Available from commodity exchanges / futures
  markets

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Agricultural Futures Markets

• Has some unique features due to the nature of
  agricultural businesses
• Supply comes online a few times during the year
• So at harvest, supply spikes, then diminishes
  until the next harvest
• Production decisions are based price forecasts
• Planting decisions can be made a full year (or
  more) before the crop price is realized
• Users provide year-round demand
• Livestock feeding, biofuel production, food demand

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Futures Market Exchanges

• Competitive markets
• Open out-cry and electronic trading
• Centralized pricing
• Buyers and sellers are both in the market
• Relevant information is conveyed through the bids
  and offers for the trades
• Bid the price at which a trader would buy the
  commodity
• Offer the price at which a trader would sell
  the commodity

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CME Group

• http//www.cmegroup.com/
• Products
• Agricultural commodities
• Corn, soy, cattle, hogs, etc.
• Energy
• Currency
• Metals
• Weather
• Others

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Futures Contracts

• A legally binding contract to make or take
  delivery of the commodity
• Trading the promise to do something in the future
• You can offset your promise
• Standardized contract
• Form (weight, grade, specifications)
• Time (delivery date)
• Place (delivery location)

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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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• Class web site
• http//www.econ.iastate.edu/chart/Classes/econ337
  /Spring2014/
• Have a great weekend!