Econ 338c. April 12, 2007

Transcription

1 60 Econ 338c April 12, 2007

2 10 Traits of a Successful Grain Marketer Starts Early (before planting) Knows production, storage costs & risk bearing ability Understands basis & mkt. carry Follows several relevant markets daily Manages yield risk with revenue insurance Has discipline to price when goals are reached Knows various contracts & when to use them Relies on good sources of market information Has an exit plan Keeps marketing records & evaluates results 61

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5 Profit Equation for Grain 64 Producers: What are the three key variables? Cost, Price & Yield

6 Cost Data, Francis Childs Avg. Farm Yield: 394 bu./a. 65 Land charge $199/A. Operating Expenses Total Cost $ Break-even price? $2.20 avg. price?

7 Cost Data, Francis Childs Avg. Farm 66 Yield: 394 bu./a. Land charge $199/A. Operating Expenses Total Cost $ Break-even price 1.68/Bu. Profit, $2.20 avg. price /A. On 400A.: $81,952 + $79,600 for owned land

8 Assignment: Working individually or in teams of 2 to 4 people, answer these questions: 1. How much better have advisory service recommendations as a group been over the study period, in average cents per bushel, than the average price received by farmers? corn soybeans 2. For the services as a group, how did their average price compare with the 20-month market benchmark? Corn, Soybeans. 3. For the services as a group, how did their average price compare with the 24-month market benchmark? Corn, Soybeans. Full Report: All Tables: AGMASS Excel Summary table: see class web site Univ. of Illinois does an annual evaluation of Ag Market Advisory Services. You can get the report at the above web address. See Especially the Excel summary table on our class web site. 67

9 Univ. of Illinois annual evaluation of Ag Market Advisory Services, continued Has any one advisory service been able to beat the 24 month market benchmark every year over the study period? 5. How much does the relative ranking of advisory services vary from year to year? 6. Brock is an advisory service used by Cargill in some of its new generation contracts. On average, how has Brock ranked among advisory Services? 7. Pro Farmer is headquartered in Cedar Falls, Iowa. How has it ranked among advisory services, on average? 8. Doane is a long-time farm management and advisory service. How has it ranked among advisory services?

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12 New-Crop Pricing 71 When is the best chance for reaching price goals? What tools will best fit my needs? What are the risks? How much to sell? months to sell?

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14 Gain vs. harvest cash sales 73

15 Average Annual Net Cash Flow, Alternative 74 Strategies, , 1200 Acres Corn/Soybeans (000 $) No Insur. Cash Renter Buyer-Renter Debt-Free Harvest Pre- Harvest Harvest Pre- Harvest Harvest Pre- Harvest MPCI CRC Pre-Harvest Denotes Pricing Before Harvest, * Primarily With Options

16 Marketing Tools 75 Futures markets Options markets Elevator contracts New-generation contracts Storage on & off the farm Basis as a tool for determining where to sell & a partial answer to When to sell? (Important for all of above + cash sales)

17 Basis: Key to Understanding 76 Regional Variations in Price Three Components of Price: Level = Futures Basis Spreads over Time Basis: Cash Price Minus a SpecificFutures Contract price Example: N.C. Iowa Cash $3.29 May $3.63 (4/05/07) Basis?

18 Ways of Using Basis 77 information for farmer marketing For evaluating forward contracts For pre-harvest & storage hedging decisions For market signals For decisions about ownership of grain or options

19 If harvest Basis is 78 strong Market says sell now If weak: Signals to store & hedge or use hta contract

20 Factors Affecting the Basis Local supply conditions 2. Transportation problems 3. Planting activity 4. Harvesting weather 5. Storage space availability 6. Regional & global supply & demand 7. Handling ability of elevators 8. Processing activity

21 Factors Affecting the Basis Anything slowing demand tends to weaken basis 2. Anything increasing movement into market channels tends to weaken the basis 3. Any problems in handling, storing, or transporting grain weakens the basis

22 How would these factors affect basis? 1. After long delays, farmers have a break in weather & are busy with spring fieldwork 2. Summer weather has turned quite dry and temperatures are 100s across the Corn Belt 3. A hurricane has halted shipments from the U.S. Gulf 4. Elevators are piling grain outside 5. A large local feedlot is out of business 6. Rain is delaying harvest 7. Local ethanol plants are short on corn 81

23 Using Basis to localize 82 futures price for hedging December futures $3.33/bu. Less expected harvest basis 0.45 Less transaction cost 0.01 Expected hedge price $2.87

24 Hedging Grain 83 Protects against price drop Can not follow the market up if Prices rise Pre-harvest corn: Procedure: sell Dec. futures for the amount you want to sell. CBOT futures are 5,000 bu. Contracts Mid-America: 1,000 bu. contracts

25 Risk premium in early new-crop forward corn contracts? 84

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27 Past performance is not a quarantee of future price behavior 86

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29 8-MonthStorage $2.90 Corn 88 Shrinkage below 15% Extra drying Extra handling Interest (8%) Storage charge Quality deterioration & storage shrink Total costs On-farm Off-farm $0.073 (to 13%) $ (Fixed cost) $0.331 $0.425

30 8-MonthStorage 89 $7.00 Soybeans Extra handling Interest (8%) Storage charge Quality deterioration & storage shrink Total costs On-farm Off-farm (Fixed cost) $0.425 $0.564

31 Variable Costs of Corn Storage 90 $2.00 $1.95 $1.90 $1.85 $ /2002 Corn Crop (through 04/03/02): Average Iowa Price and Cost of Ownership hdg. return Off-farm On Farm Interest + other costs Interest Only $1.75 $1.70 $1.65 $1.60 Example Costs of Ownership: 1 cent per bu. per month storage + 7.5% Interest. Costs start 10/24/01 O N D J F M A M J J

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36 If harvest Basis is 95 strong Market says sell now Is it better to buy futures than store? Will cash & futures go up in sync.? Example: Harv. Cash 2.80, July fut.3.55 Next spring: cash 2.95, July fut Gain from cash storage: $0.15 Gain from July futures? Net storage return with $0.22 cost?

37 Keeping Basis Records for Farm Marketing Decide what markets are relevant Daily record of cash & futures prices ideal Once/week is adequate--thursday Get current cash & forward contract bids if available Update continually Keep charts Iowa district basis may be starting point Excel: good for basis analysis 96

38 PRICING DECISION CHART 97 ALTERNATIVES 1. Store and wait to price 2. Delayed price contract 3. Min. price contract variable basis Futures Price Up ALTERNATIVES 1. Basis contract 2. Sell cash and buy futures (long) 3. Buy call 4. Min. price contract set basis Strengthen Basis Expected Change Basis Weaken ALTERNATIVES 1. Hedge 2. Hedge to arrive Non-Roll, basis not set 3. Put option Futures Price Down ALTERNATIVES 1. Cash sales 2. Forward contract 3. Hedge to arrive fixed basis

39 Grain Contracts: Areas of 98 Risk Exposure Price Level Basis Spreads (Intra-and Inter-Year) Options volatility risk Production risk Counter-party risk Control risk Tax risk

40 Types of conventional grain contracts Forward contract: establishes price & basis Delayed price: neither is established Price later: same as above (credit sale) Hedge-to-arrive (non-roll): establishes futures, but not basis Delayed-payment: shifts income for tax purposes Basis contract: establishes basis, not futures Minimum-price: retains upward flexibility 99

41 Traditional Grain 100 Contracts Forward contract: locks in price level, basis, spreads Hedge to Arrive: does not lock in Basis Basis Contract: locks in basis but not price Price Later contract: doesn t lock in either one (You lose ownership cash out LDPs first)

42 Traditional Grain 101 Contracts Premium offer contract Typically involves sale of options & farmer potential sale commitment in next season

43 Minimum Price 102 Contract Establishes a floor price & lets you follow the market higher if it goes up Elevators add call option purchase to forward contract Locks in current price level & basis Farmer pays cost of buying the call option Typically used for retaining ownership into summer About 80% of time, corn calls will be worthless

44 Dec Corn 103 Dec. 05 high $ /04/04 Low: $ /18/05 & 2/09/05 Note strong incentive to monitor New crop pricing opportunities as much as months ahead of harvest, especially for high-cost producer. Price data from Don Rose, U.S. Commodities, Des Moines, IA

45 Dec Corn 104 Price data from Don Rose, U.S. Commodities, Des Moines, IA

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47 Dec Corn 106 Price data from Don Rose, U.S. Commodities, Des Moines, IA

48 Dec Corn 107 Price data from Don Rose, U.S. Commodities, Des Moines, IA

49 Dec Corn 108

50 Dec Corn 109

51 110 Nov. Soybeans 2003 Price data from Don Rose, U.S. Commodities, Des Moines, IA

52 Nov. Soybeans Price data from Don Rose, U.S. Commodities, Des Moines, IA

53 Nov. Soybeans Price data from Don Rose, U.S. Commodities, Des Moines, IA

54 Nov. Soybeans Price data from Don Rose, U.S. Commodities, Des Moines, IA

55 Nov. Soybeans Price data from Don Rose, U.S. Commodities, Des Moines, IA

56 Nov. Soybeans Price data from Don Rose, U.S. Commodities, Des Moines, IA

57 Nov. Soybeans Price data from Don Rose, U.S. Commodities, Des Moines, IA

58 Yield Deviation from Trend strongly Influences Price Deviation vs. Loan Rate % of time yields are 8% or more above trend 40% of years had yield 8% or more above trend 20% of years had yield 8% or more below trend

59 Corn yields, selected Iowa counties 118 IA. Avg. Obrien Story Taylor Scott Avg St.Dev

60 Refresher on Options Markets 119 Two Types: Puts & Calls (CBOT) Buying Puts: Insure against lower prices Buying Calls: lets you follow market higher after a cash sale No further market expense after buying Cost: premium plus brokerage charge Selling puts: you have an obligation to sell grain at strike price if market goes lower Maximum gain = initial premium

61 120 ricing 50% of yield with puts Declining price : put value tends to rise, adds value to half of crop Rising price:value of 100% of crop increases; only cost is options prm. + brokerage Unchanged price: Worst-case? Premium lost, price doesn t rise

62 Determining Minimum 121 Price With Put Purchase Select Strike Price: $3.50 Deduct: expected harv. basis premium transaction cost Expected Minimum Price $2.89

63 Corn Put Example, May 18, $2.60 put prem.: $.16/bu. Min. price:$ basis = $2.04 Sept. 30 put prem.=$.52, fut. =$2.08 Harvest Cash corn = $1.55 Corn priced with puts: added value: $ = +$.36 Upward price flexibility retained, can store, collect LDP, hedge for May 2001 Gain on 80% of 600 A. corn: $25,900 Hedge gain: $0.50/bu. or $36,000 on 600 A.

64 Difference on 600 A. corn, 80% yld.:$64,000 Corn Put Example, If prices had risen sharply: $2.60 put prem., May 18: $.16/bu. Min. price:$ basis= $2.04 Sept. prices for Dec. corn: $3.60 Sept. 30 put prem.= $0 Harvest Cash corn = $3.25 Corn priced with puts: Net price $ put prem. = $3.09/Bu. Corn Contracted in May: $2.20/bu.

65 Next Week (April 19) 124 Steve Johnson will teaching, with help from Ed Kordick, Iowa Farm Bureau Program: winning the game a simulated marketing year & you do the marketing April, 26 will be review session for the final Final will be take-home final, available on the class web site Final must be turned in to Cindy Pease, 460 Heady Hall by no later than May 4, 2007