Understanding Markets and Marketing

Transcription

1 Art Understanding Markets and Marketing Randy Fortenbery School of Economic Sciences College of Agricultural, Human, and Natural Resource Sciences Washington State University

2 The objective of marketing is: NOT to make money in the futures market. NOT to sell at the highest price of the year. NOT to generate accurate price forecasts. TO minimize the risk associated with achieving a target level of income.

3 How is your grain price determined?

4 LOCAL ELEVATOR: Grade Grain Condition Grain Store Grain Reveal the first public price for grain SUBTERMINAL ELEVATOR: Linked to local elevator by rail, barge, or truck Often do not buy directly from farmers Major function is to concentrate grain into large shipments Reveal second public price for grain. Basically the local elevator price plus transportation and handling costs. TERMINAL ELEVATOR: Sell to export markets and processors. Do not buy from farmers. Reveal third public price for grain. Sub-terminal price plus transportation and handling costs. EXPORT TERMINAL ELEVATORS: Very concentrated industry. Over half of the U.S. export capacity is owned by Cargill, Bunge, and Louis Dreyfus. Offer the export price to compete in the international market.

5 Futures Market Sends price signals to the entire system Actively used at all levels of the grain market chain EXCEPT the farm Is unique in its application of financial leverage

6 Soft Red Wheat Futures 9:25 yesterday Month Last Chg High Low Dec '4-0'6 400'4 400'4 Mar '2 2'0 420'6 414'0 May '0 2'2 431'2 425'0 Jul '6 2'0 443'0 437'0 Sep '2 2'0 456'0 450'4 Dec '4 1'2 473'2 468'0 Mar '0 1'2 483'6 482'4 May '2 2'4 491'2 491'

7 July 2017 Futures Prices for Soft Red Winter Wheat

8 September 2017 Futures Prices for Soft Red Winter Wheat

9 July 2017 Futures Prices for Hard Red Winter Wheat

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11 March 2017

12 Dec 13 - $4.74

13 Basis and Price Formation Basis is the difference between a cash price at a specific location and the price of a particular futures contract. The cash price offered to a grain producer for any given marketing strategy is a function of local basis.

14 Basis Changes The lower the cash price relative to futures prices, the weaker the basis. A weak basis is good for cash buyers,and bad for cash sellers The higher the cash price is relative to futures, the stronger the basis. A strong basis is bad for cash buyers,and good for cash sellers.

15 Major Factors Determination of Basis COST OF STORAGE: Determines basis over a given crop year. Also affects the price difference between a nearby and a distant futures contract in a given crop year. COST OF TRANSPORTATION: Determines basis geographically.

16 Determination of Basis Other Factors: Local supply and demand conditions Grain quality Intensity of local Competition

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20 Soft Red Wheat Futures 9:25 yesterday Month Last Chg High Low Dec '4-0'6 400'4 400'4 Mar '2 2'0 420'6 414'0 May '0 2'2 431'2 425'0 Jul '6 2'0 443'0 437'0 Sep '2 2'0 456'0 450'4 Dec '4 1'2 473'2 468'0 Mar '0 1'2 483'6 482'4 May '2 2'4 491'2 491'

21 Recording Basis To record historical basis levels, collect closing futures prices for the contract closest to maturity (but not expiring in the current month) each Wednesday, and the corresponding cash price (collected later Wednesday or Thursday morning). Subtract the futures price from the cash price. Average the Wednesday basis calculations for each month to arrive at the average monthly basis level.

22 Odessa Washington White Wheat Basis Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb 2008/09 -$0.71 -$0.41 -$0.80 -$0.85 -$0.50 -$0.86 -$0.48 -$0.21 -$0.32 -$0.57 -$0.60 -$ /09 $0.71 $0.41 $0.80 $0.85 $0.50 $0.86 $0.48 $0.21 Sep 2009/10 $0.41 $0.40 $0.62 $0.82 $1.09 $0.92 $0.81 $0.72 Oct 2010/11 $1.32 $0.96 $1.21 $1.22 $0.85 $0.86 $0.70 $ /10 -$0.41 -$0.40 -$0.62 -$0.82 -$1.09 -$0.92 -$0.81 -$0.72 -$0.65 -$0.61 -$0.54 -$ /11 -$1.32 -$0.96 -$1.21 -$1.22 -$0.85 -$0.86 -$0.70 -$0.61 -$0.67 -$0.43 -$0.47 -$ /12 -$0.51 -$0.72 -$0.74 -$0.66 -$0.73 -$0.75 -$0.37 Average -$0.74 -$0.69 -$0.86 -$0.96 -$0.82 -$0.88 -$0.66 -$0.51 -$0.55 -$0.54 -$0.54 -$0.32

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25 Actual offer for August 2016 $5.87 per bushel Realized price $5

26 Actual offer for 2017 $4.85

27 Dice 70.00% 60.00% 50.00% Probability 40.00% 30.00% 20.00% 10.00% 0.00% Value of Rolling Two Dice

28 2009/2010 White Wheat Cash Prices $4.50 $4.75 $5.00 $5.25 $5.50 $5.75 $6.00 $6.25

29 2012/13 Crop Year White Wheat Cash Prices $6.75 $7.00 $7.25 $7.50 $7.75 $8.00 $8.25

30 14 Fall 2015 White Wheat Prices $5.40 $5.50 $5.60 $5.70 $5.80 $5.90

31 July 2015 Futures Weekly Prices $4.75 $5.00 $5.25 $5.50 $5.75 $6.00 $6.25 $6.50

32 2015 July Wheat Futures Prices $5.00 $5.50 $6.00 $6.50

33 2014 July Futures Prices $5.50 $6.00 $6.50 $7.00 $7.50

34 Large World Wide Stocks 70.00% 60.00% 50.00% Probability 40.00% 30.00% 20.00% 10.00% 0.00% $4.50 $4.75 $5.00 $5.25 $5.50 $5.75 $6.00 $6.25 $6.50 $6.75 $7.00 Value of Rolling Two Dice

35 Normal World Wide Stocks 70.00% 60.00% 50.00% Probability 40.00% 30.00% 20.00% 10.00% 0.00% $5.50 $5.75 $6.00 $6.25 $6.50 $6.75 $7.00 $7.25 $7.50 $7.75 $8.00 Value of Rolling Two Dice

36 Low World Wide Stocks 70.00% 60.00% 50.00% Probability 40.00% 30.00% 20.00% 10.00% 0.00% $6.50 $6.75 $7.00 $7.25 $7.50 $7.75 $8.00 $8.25 $8.50 $8.75 $9.00 Value of Rolling Two Dice

37 Production Costs for Conventional Tillage Soft White Winter Wheat, More Than 18" Precipitation Quantity Price or Value or Item Per Acre Unit Cost/Unit Cost/Acre Gross Returns Wheat 80 bu Total Acres 1000 = 80,000 bushels Variable Costs Seed: $20.70 Wheat Seed 90 lb $0.23 $20.70 Fertilizer: $77.80 Nitrogen (dry) 90 lb $0.66 $59.40 Phosphorous (dry) 30 lb $0.53 $15.90 Sulfur (dry) 10 lb $0.25 $2.50 Pesticides: $31.42 Osprey 4.75 oz $4.10 $19.48 Starane+Salvo 22 oz $0.50 $11.00 Excel oz $0.16 $0.51 Brox M 1.6 oz $0.27 $0.43 Machinery: $55.10 Fuel 6.32 gal $3.50 $22.14 Lubricants 1 acre $3.32 $3.32 Machinery Repairs 1 acre $9.68 $9.68 Machinery Labor 1.12 acre $17.80 $19.96 Custom & Consultants: $10.18 Rental Sprayer 1 acre $1.93 $1.93 Rental Stubble Shredder 0.5 acre $11.00 $5.50 Rental Ripper Shooter 1 acre $2.75 $2.75 Other: $21.75 Crop insurance 1 acre $21.75 $21.75 $0.00 $0.00 Overhead 1 $10.85 Operating Interest 2 $6.24 Total Variable Costs $ Variable Costs per Unit $2.93

38 Fixed Costs: Machinery depreciation $22.86 Machinery interest $13.11 Machinery insurance, taxes, housing, licenses $5.34 Land Cost* 1 acre $ $ *Based on Share Rent Percentage: Landlord 33.00% Tenant 67.00% Cash rent $0.00 Land taxes $6.33 Total Fixed Costs $ Fixed Costs per Unit $2.24 Total Costs per Acre $ Total Cost per Unit $5.17 Notes: 1 Covers legal, accounting, and utility fees. Calculated as 5% of operating expenses. 2 Calculated as 5.75% interest on operating capital for 6 months. Breakeven Analysis: % Base 10% Yield Price Operating Cost Breakeven $3.25 $2.93 $2.66 Ownership Cost Breakeven $2.49 $2.24 $2.04 Total Cost Breakeven $5.74 $5.17 $ % Base 10% Price Yield $4.95 $5.50 $6.05 Operating Cost Breakeven Ownership Cost Breakeven Total Cost Breakeven

39 Conflicting Market Information

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41 Actual vs. Forecast Price $8.80 $8.60 $8.40 $8.20 $8.00 $7.80 $7.60 $7.40 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Winter Wheat Price Low of October forecast Range High of October Price Range Forecast

42 Actual vs. Forecast Price $7.60 $7.40 $7.20 $7.00 $6.80 $6.60 $6.40 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Winter Wheat Price Low of October forecast Range High of October Price Range Forecast

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44 Developing a Grain Marketing Plan

45 Definition A grain marketing plan identifies a producer s specific price objectives as the production and/or storage season progresses. It then identifies strategies available to achieve the price objectives.

46 Definition cont. While it may take several forms, it is generally most useful if it is written down, and reviewed relative to market conditions on a regular basis. A marketing plan must be flexible. A producer must be able to adapt to market conditions if it becomes clear that an earlier price objective is not likely to be achieved.

47 Four Major Factors Influence the Marketing Plan Personal feelings and attitudes about marketing. Financial needs of the business. Seasonal price patterns. Current price outlook.

48 Personal Attitude: Speculator or Risk Manager Speculator Try for highest price of the year. Focus on day-to-day price movement Calculates money lost by not selling at highest price. Views prices as separate from the business. Planning horizon focused on short term profits. Risk Manager Major goal is making a profit. Focuses on survival and growth of business. Integrates marketing as a part of the business. Knows what price covers costs. Planning horizon is long term growth of business. Does not dwell on lost prices.

49 Identifying Financial Objectives Identify risk bearing ability. This requires an accurate net worth statement. High net worth allows for a substantial loss without bankrupting the business. Small net worth requires careful consideration in absorbing risk. Identify costs of production. Include a charge for family living expenses. Identify acceptable return over production costs.

50 Identify Seasonal Price Patterns Identify Seasonality in Price. Identify Seasonality in local basis.

51 Examine Current Price Outlook Price outlook is a dominant force in many marketing plans. However, its importance is frequently exaggerated. Price forecasts tend to be quite poor as the planning horizon lengthens, and a portion of each year s crop should be marketed based on financial considerations regardless of current outlook.

52 Market Plan Development Step 1 Futures Market Hedge Put Options Call Options Cash Market Forward Cash Contract Basis Contract Storage Minimum Price Contract No Price Established Hedge to Arrive

53 Market Plan Development Step 2 Step 2 in the marketing plan development is to identify the specific marketing horizon(s). Pre-harvest Harvest Post-harvest

54 Market Plan Development Step 3 The third step in developing a marketing plan is to segregate expected production into marketable units, and identify pricing objectives. March Wheat Futures Prices

55 Result of Market Plan A road map is developed which lays out specific objectives you want to satisfy. If an objective is satisfied, you made an excellent marketing decision REGARDLESS of what happens to prices later. Establishes an informed criteria on which to base storage decisions. Identifies exactly how much speculation (risk) you are willing to tolerate.

56 What Should You Do? Abnormally strong basis get rid of cash price risk. Futures prices in top third of historical range manage futures price risk. Strong basis and high futures prices be very careful of betting very much on market outlook.