Price Trend Effects On Cash Sales & Forward Contracts. Grain Marketing Principles & Tools Cash Grain Basis, Forward Contracts, Futures & Options

Transcription

1 Grain Marketing Principles & Tools Cash Grain Basis, Forward Contracts, Futures & Options Dr. Daniel M. O Brien Extension Agricultural Economist K-State Research and Extension Price Trend Effects On Cash Sales & Forward Contracts Pricing Falling Rising Wider Narrower Alternatives Futures Futures Basis Basis Cash Market Sales ( ) (+) ( ) (+) Forward Cash Contract None None None None Basis Contract ( ) (+) None None Hedge-to-Arrive (HTA) None None ( ) (+) Minimum Price Contract None (+) None None Price Later Contract ( ) (+) ( ) (+) 2008 K-State Risk Assessed Marketing Workshops Price Trend Effects On Futures, Options & Marketing Loans Pricing Falling Rising Wider Narrower Alternatives Futures Futures Basis Basis Short Futures Hedge None None ( ) (+) Buy Put Options None (+) ( ) (+) Sell Cash & Buy Calls None (+) None None Marketing Loans None (+) ( ) (+) Risk Exposure of Marketing Tools A. Options Volatility Risk Risk that option premiums will not change 1-for-1 with cash/futures as the price level changes B. Production Risk if Pre-harvest Pricing Risk of being unable to deliver grain to fulfill a contract C. Counter Party Risk Risk that a buyer wont fulfill their contract obligations D. Control Risk Risk of market actions getting out of control before corrective actions can be taken by the seller?

2 Areas of Risk Exposure For Cash Sales & Forward Contracts Pricing Alternatives Prodn. Risk if Counter Party Options Volatility Prehvst. Risk Control Risk Cash Market Sales Yes Forward Cash Contract --- Yes Yes --- Basis Contract --- Yes Yes Yes Hedge-to-Arrive (HTA) --- Yes Yes Yes Minimum Price Contract Yes Yes Yes Yes Areas of Risk Exposure For Futures, Options & Marketing Loans Pricing Alternatives Options Volatility Prodn. Risk if Prehvst. Counter Party Risk Control Risk Short Futures Hedge --- Yes --- Yes Buy Put Options Yes Yes --- Yes Sell Cash & Buy Calls Yes Yes Marketing Loans Yes Price Later Contract Yes Yes Hedging With Futures Price Hedges on Grain Production 1) (Prehedge) Analyze hedging opportunity Futures less Basis less Brokers fees 2) (Placing the Hedge) Sell futures contract(s) nearest to the grain delivery period In a Short or sell futures position 3) (Closing Out the Hedge Position) Buy back futures contract(s) Sell cash grain (optional) Grain Forward Pricing Decisions How Much to Forward Contract or Hedge? For Pre-Harvest Pricing: Max of 50%-75% of expected production (average yields) If have a short crop, use Crop Insurance Coverage revenues to help fill Forward Contract obligations Recommended: A disciplined grain marketing plan What Time Period to Set Grain Delivery In? Examine Harvest vs Post Harvest Basis, Storage Returns, and Grain Delivery Opportunities Timing of cash flow needs

3 Forward Contract Vs Futures Hedge If Basis Projection is Accurate, then.. Forward Contract $ = Futures Hedge $ Who Carries the Futures Account? FC: Elevator contacts broker & pays any margin calls Hedge: Producer works w. broker, pays margin calls Delivery Commitment? FC: Delivery commitment of X bushels for $X price Hedge: No delivery commitment to elevator Basis Commitment? FC: Set cash basis / Hedge: Varying cash basis New Crop July 2009 HRW Wheat Examples for Friday, March 6, 2009 KCBT July 2009 HRW Wheat Prices Seasonal Average Cash Price Trends Basis History ( ) Futures Hedge & Forward Contract for Harvest Delivery Put & Call Option Premiums (3/6/09) Hard Red Winter Wheat Futures KCBT: 2000 through 2009 KCBT JULY 2009 HRW Wheat March 6, 2008 March 6, 2009 $7.50/bu $5.00/bu $2.50 $7.00 $6.00 $5.00

4 Cash Wheat Basis: McPherson, KS Years Preharvest Wheat Hedge Hedging on Tuesday, March 6, 2009 Target Sales Date: July 1, 2009 Wheat Futures Price (3/6/09) July 09 KCBT Wheat = $5.81 1/4 Expected Corn Basis (McPherson, KS) $0.63 under JULY KCBT Wheat on July 1 st 2009 Wheat Hedge Expected Price = $5. 18 /bu JULY KCBT Wheat Basis Broker s Fees $ $ $0. 01 = $ New Crop Bids (3/6/09): $0.63 /bu under JULY KC Wheat

5 New Crop Wheat Hedge Example Scenario A: Falling Wheat Prices into 2009 Harvest Date Cash Expt. $: $5.18 ($ *) By July 1, 2009 On 3/6/09 No Cash Transactions On 7/1/09 Sell Cash $3.68 Futures Basis On 3/6/09 Expt Sell JULY ($0.63) On 7/1/09 Actual Buy JULY ($0.63) Net Gain/Loss on Futures: Gain of $1.50 /bu ($0.01 broker fee) Final Net Price = $5.18 /bu Cash $ $1.50 Futures Gain New Crop Wheat Hedge Example Scenario B: Rising Wheat Prices into 2009 Harvest Date Cash Expt. $: $5.18 ($ *) By July 1, 2009 On 3/6/09 No Cash Transactions On 7/1/09 Sell Cash $6.68 Futures Basis On 3/6/09 Expt Sell JULY ($0.63) On 7/1/09 Actual Buy JULY ($0.63) Net Gain/Loss on Futures: Loss of $1.50 /bu ($0.01 broker fee) Final Net Price = $5.18 /bu Cash $6.68 $1.50 Futures Loss 2009 NC Wheat Forward Contract McPherson, Kansas $5.18 /bu on 3/6/09 FC Basis: $0.63 /bu under KC July 2009 Wheat Futures JULY 09 HRW Wheat Put-Call Option $s Premium $/ bu $1.20 JULY 2009 KCBT Wheat Close: $5.81 1/4 /bu on March 6, 2009 $ $ $ Mid Kansas Coop, McPherson, Kansas March 10, 2008 March 6, 2009 Source: DTN Bid Analyzer $5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30 Put Option Premiums Call Option Premiums

6 2009 JULY Wheat Put Option Values 2009 JULY KC Wheat Put Price Floors $1.80 $1.50 JULY 2009 Wheat Futures Close: $5.81 1/4 /bu on March 6, 2009 $8.00 At the Money: $5.81 1/4 /bu $1.20 $0.90 $0.60 $0.30 "Out of the Money" Puts: SP < Futures "In the Money" Puts: SP > Futures $6.00 $4.00 $ $4.39 $4.45 $4.50 $4.55 $4.59 $4.63 $4.67 $4.70 $4.74 $4.77 $5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30 Put Time Value Put Intrinsic Value $5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30 Floor Price* Basis Put Premium Broker Fee Results of Buying a $5.80 July Wheat Put $0.55 1/2 /bu Net Return $/bu $9.00 $7.00 $5.00 $1.00 $3.18 $4.60 $4.60 $4.60 $4.60 $4.60 $3.68 $4.18 $4.68 $5.18 $7.18 $6.68 $6.60 $6.18 $6.10 $5.60 $5.10 $5.68 July 2009 Wheat Call Option Values $1.50 $1.20 $0.90 $0.60 $0.30 In the Money Calls: SP < Futures July 2009 Wheat Futures Close: $5.81 1/4 /bu on March 6, 2009 Out of the Money Calls: SP > Futures ($1.00) $3.81 $4.31 $4.81 $5.31 $5.81 $6.31 $6.81 $7.31 $7.81 Futures Prices Cash Price Net Put Return Net Price Received $5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30 Call Time Value Call Intrinsic Value

7 JULY 09 KC Wheat Call Price Coverage Minimum Price Increase Needed to Cover Call Premium Cost $9.00 $ $5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30 $5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30 At the Money: $5.81 1/4 /bu (3/6/09) Strike Price Call Option Premiums Broker Fee Results of Buying a $5.80 JULY 2009 Wheat Call $0.56 3/4 /bu Net Return $/bu $4.50 $1.50 ($1.50) July 2009 Wheat Futures Close: $5.81 1/4 /bu on 3/6/09 $0.50 ($0.59) ($0.59) ($0.59) ($0.59) ($0.59) ($0.09) $2.00 $1.00 $1.50 $0.91 $1.41 $0.41 $3.81 $4.31 $4.81 $5.31 $5.81 $6.31 $6.81 $7.31 $7.81 Futures Prices Call Purchase Price Call Selling Price Broker Fee Net Call Returns New Crop DEC 2009 Corn Examples for March 6, 2009 Corn Futures CBOT: 2000 through 2009 CBOT DEC 2009 Corn Futures Prices Seasonal Average Cash Price Trends Basis History ( ) Futures Hedge & Forward Contract for Harvest Delivery $5.00 $7.50/bu $3.75 $5.00/bu $2.50 Put & Call Option Premiums (3/6/09)

8 CBOT DEC 2009 Corn March 6, 2008 March 6, 2009 $4.50 $4.00 $3.50

9 Cash Corn Basis: McPherson, KS Years Cash Milo Basis: McPherson, KS Years New Crop Bids (3/6/08): $0.51 /bu under DEC Corn 2009 New Crop Bids (3/6/09): $1.14 /bu under DEC Corn 2008 Preharvest Corn Hedge Hedging on Tuesday, March 6, 2009 Target Sales Date: November 15, 2008 Corn Futures Price (3/6/09) December 09 CBOT Corn = $3.90 3/4 Expected Corn Basis (McPherson, KS) $0.51 under DEC CBOT Corn on November 15 th 2009 Corn Hedge Expected Price = $3. 39 /bu DEC 09 CBOT Corn Basis Broker s Fee $ $ $0. 01 = $3. 39 New Crop Corn Hedge Example Scenario A: Falling Corn Prices into 2009 Harvest Date Cash Expt. $: $3.39 ($ *) By November 15, 2009 On 3/6/09 No Cash Transactions On 11/15/09 Sell Cash $1.89 Futures Basis On 3/6/09 Expt Sell DEC ($0.52) On 11/15/09 Actual Buy DEC ($0.52) Net Gain/Loss on Futures: Gain of $1.50 /bu Final Net Price = $3.39 /bu Cash $ $1.50 Futures Gain

10 New Crop Corn Hedge Example Scenario B: Rising Corn Prices into 2009 Harvest Date Cash Expt. $: $3.39 ($ *) By November 15, 2008 On 3/6/09 No Cash Transactions On 11/15/09 Sell Cash $4.89 Futures Basis On 3/6/09 Expt Sell DEC ($0.52) On 11/15/09 Actual Buy DEC ($0.52) Net Gain/Loss on Futures: Loss of $1.50 /bu Final Net Price = $3.30 /bu Cash $4.89 $1.50 Futures Loss 2009 New Crop Corn Forward Contract McPherson, Kansas Mid Kansas Coop, McPherson, Kansas March 10, 2008 March 6, 2009 Source: DTN Bid Analyzer $3.40 /bu on 3/6/09 FC Basis: $0.51 /bu under CBOT DEC 2009 Corn Futures DEC 2009 Corn Put-Call Option Prices DEC 2009 Corn Put Option Values $1.50 $1.00 $0.50 DEC 2009 Corn Futures Close: $3.90 3/4 /bu on March 6, 2009 $0.83 $0.77 $0.72 $0.67 $0.62 $0.57 $0.57 $0.51 $0.41 $0.46 $0.33 $0.37 $0.83 $0.90 $0.76 $0.69 $0.63 $0.53 $0.50 $0.47 $0.44 $0.41 $1.50 $1.20 $0.90 $0.60 $0.30 DEC 2009 Corn Futures Close: $3.90 3/4 /bu on March 6, 2009 "In the Money" Puts: SP > Futures "Out of the Money" Puts: SP < Futures $3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40 Strike Price Put Option Premiums Call Option Premiums $3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40 Put Time Value Put Intrinsic Value

11 DEC 2009 Corn Put Price Floors $5.00 $4.00 $2.00 $1.00 At the Money: $3.90 3/4 /bu (3/6/09) $2.54 $2.60 $2.66 $2.71 $2.76 $2.80 $2.84 $2.88 $2.91 $2.94 $2.97 Results of Buying a $3.90 DEC 2009 Corn Put $0.56 5/8 /bu Net Return $/bu $7.00 $5.00 $1.00 $1.39 $2.80 $2.80 $2.80 $2.80 $2.80 $1.89 $2.39 $2.89 $3.39 $4.89 $5.39 $4.80 $4.39 $4.30 $3.80 $3.30 $3.89 $3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40 ($1.00) $1.90 $2.40 $2.90 $3.40 $3.90 $4.40 $4.90 $5.40 $5.90 Futures Prices Floor Price* Basis Put Premium Broker Fee Cash Price Net Put Return Net Price Received DEC 2009 Corn Call Option Values $1.80 $1.35 $0.90 $0.45 DEC 2009 Corn Futures Close: $3.90 3/4 /bu on March 6, 2009 In the Money Calls: SP <Futures Out of the Money Calls: SP > Futures DEC 2009 Corn Call Price Coverage Minimum Price Increase Needed to Cover Call Premium Cost $6.00 $5.00 $4.00 $2.00 $1.00 At the Money: $3.90 3/4 /bu (3/6/09) 0.83 $ $ $ $ $ $ $ $ $ $ $4.40 $3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40 $3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40 Call Time Value Call Intrinsic Value Strike Price Call Option Premiums Broker Fee

12 Results of Buying a $3.90 DEC 2009 Corn Call $0.57 3/8 /bu Net Return $/bu $4.50 $1.50 ($1.50) DEC 2009 Corn Futures Close: $3.90 3/4 /bu on 3/6/09 $0.50 ($0.10) ($0.60) ($0.60) ($0.60) ($0.60) ($0.60) $2.00 $1.50 $1.40 $1.00 $0.90 $0.40 $1.90 $2.40 $2.90 $3.40 $3.90 $4.40 $4.90 $5.40 $5.90 Futures Prices Call Purchase Price Call Selling Price Broker Fee Net Call Returns New Crop NOV 2009 Soybeans Examples for March 6, 2009 CBOT NOV 2009 Soybean Futures Prices Seasonal Average Cash Price Trends Basis History ( ) Futures Hedge & Forward Contract for Harvest Delivery Put & Call Option Premiums (3/6/09) Soybean Futures CBOT: 2000 through 2009 CBOT NOV 2009 Soybeans March 6, 2008 March 6, 2009 $10.00 $7.50/bu $7.50 $5.00 $10.50 $9.00 $7.50

13 Cash Soybean Basis: McPherson, KS Years NC Soybean Forward Contract McPherson, Kansas $7.10 /bu on 3/6/09 FC Basis: $1.05 /bu under CBOT NOV 2009 Soybean Futures 2009 New Crop Bids (3/6/09): $1.05 /bu under NOV Soybeans Mid Kansas Coop, McPherson, Kansas March 10, 2008 March 6, 2009 Source: DTN Bid Analyzer

14 NOV 09 Soybean Put-Call Option $s NOV 2009 Soybean Put Price Floors $2.40 $1.80 $1.20 $0.60 NOV 2009 CBOT Soybean Close: $8.15 /bu on March 6, 2009 $1.63 $0.57 $0.65 $1.40 $0.83 $0.74 $1.69 $1.42 $1.55 $1.29 $1.08 $1.16 $1.05 $0.94 $1.00 $0.92 $0.84 $0.77 $0.71 $0.65 $15.00 $12.00 $9.00 $ $7.20 $7.40 $7.60 $7.80 $8.00 $8.20 At the Money: $8.15 /bu (3/6/09) $8.40 $8.60 $8.80 $9.00 $9.20 $7.00 $7.20 $7.40 $7.60 $7.80 $8.00 $8.20 $8.40 $8.60 $8.80 $9.00 $9.20 $7.20 $7.40 $7.60 $7.80 $8.00 $8.20 $8.40 $8.60 $8.80 $9.00 $9.20 Put Option Premiums Call Option Premiums Strike Price Basis Put Premium Broker Fee NOV 2009 Soybean Call Price Coverage Minimum Price Increase Needed to Cover Call Premium Cost $15.00 $12.00 At the Money: $8.15 /bu (3/6/09) Questions or Comments? $9.00 $ $ $ $ $ $8.40 $8.60 $8.80 $9.00 $9.20 K-State Agricultural Economics Department Website: $7.00 $7.20 $7.40 $7.60 $7.80 $8.00 $8.20 $8.40 $8.60 $8.80 $9.00 $9.20 Strike Price Call Option Premiums Broker Fee