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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Market Participants

• Speculators have no use for the physical
  commodity
• They buy or sell in an attempt to profit from
  price movements
• Add liquidity to the market
• May be part of the general public, professional
  traders or investment managers
• Short-term day traders
• Long-term buy or sell and hold

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Corn Futures Trade
Source CFTC
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Soybean Futures Trade
Source CFTC
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Live Cattle Futures Trade
Source CFTC
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Lean Hogs Futures Trade
Source CFTC
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Bullish Speculator
Long futures position
No futures position
No futures position
Time
Now
Maturity
Later
Buy futures contract
Sell contract back
Open a long futures position
Close the long position
Make a promise
Offset the promise
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Going Long
Bought Dec. 2014 Corn _at_ 4.47
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Bearish Speculator
Short futures position
No futures position
No futures position
Time
Now
Maturity
Later
Sell futures contract
Buy contract back
Open a short futures position
Close the short position
Make a promise
Offset the promise
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Going Short
Sold Nov. 2014 Soybeans _at_ 11.09
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Speculators

• Speculators
• Buy or sell in an attempt to profit from
  favorable price movements
• Face the risk of losses from unfavorable price
  movements
• Do not produce or consume the commodity
• Benefit the market because they add liquidity
• Often trade the news of the day

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Why Speculators Like Futures Markets

• Relatively little capital required
• Initial margin, margin calls
• No need to handle commodity (e.g.,
  transportation, storage, cleaning)
• Easy to speculate on either side of the market
  (Up or Down)

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How Would You Speculate?

• Flooding is projected for Iowa
• Reports of a bumper crop in Brazilian soybeans
• Rumors of foot and mouth disease in the U.S.
• Inflation is projected to rise

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Day Traders

• Looking for quick within-day price moves
• Might be long today and short tomorrow
• Limit the risk they face by limiting their amount
  of time in the market

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Going Short
Sold Nov. 2014 Soybeans _at_ 11.09
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Short Hedge
Hedging Nov. 2014 Soybeans _at_ 11.09
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Going Long
Bought Dec. 2014 Corn _at_ 4.47
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Long Hedge
Hedging Dec. 2014 Corn _at_ 4.47
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Cash Contracts

• When we talk about a cash contract, it is an
  agreement between a seller and a buyer covering a
  quantity and quality of a product to be delivered
  at a specified location and time for a specific
  price
• If the time is now, we call it a cash contract
• If the time is sometime in the future, then its
  a forward cash contract

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Cash Bids
Key Coop http//www.keycoop.com/cash-bids
Heartland Coop https//myaccount.heartlandcoop
.com/bids.htm Cargill http//www.cargillag.com/
Marketing/LocalBids/local-bids-center West
Central Coop http//www.west-central.com/grain/w
est-central-bids/default.aspx
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The Highest Cash Price Is

• Not always the highest return
• Need to think about transportation and storage
  costs
• Compare the cash prices weve seen today
• If storage is costing me 3 cents/bushel/month, do
  the May bids look better than the current cash
  price?
• If transportation is costing me 0.5
  cents/bushel/mile, which is the better price?
• Boone (16 miles) Gilbert (8
  miles)
• Nevada (10 miles) Alleman (16
  miles)
• Eddyville (100 miles)

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Cash vs. Futures Hedge

• Cash Sales
• Locks in full price and delivery terms
• No margin requirements
• Futures Hedge
• Locks in futures price, but leaves basis open
• Could see price improvement/loss
• Can be easily offset if problems arise

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