Suggested Schedule of Educational Material (cont.)

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Piers Robbins
5 years ago
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1 Suggested Schedule of Educational Material (cont.) SECOND SESSION: Strategies to Get the Best Price Look at marketing tools Seasonality Basis Spreads Quality Differentials Developing a basic marketing plan Tools to Marketing (con t) Seasonals Seasonalitys work most of the time Respect them 1

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3 Tools to Marketing (con t) Basis Local Cash Price = Nearby futures contract price + Basis + Premiums/Discounts Can be positive or negative Is stable and predictable Tools to Marketing (con t) Basis Components of Basis Storage Insurance and interest Transportation Local supply and demand 3

4 Tools to Marketing (con t) Basis Strong basis/narrow (more positive) Benefits farmers Weak basis/wide (less positive) Benefits end users Primarily Use 5 Tools to Market Seasonality, Cash and Futures Basis Future Contract Spreads Quality Differentials Futures Price Outlook 4

5 Contract Spreads Tools to Marketing (con t) Futures Price Futures prices are hardest to peg Items that affect futures Supply and demand fundamentals Technical analysis 5

6 Suggested Schedule of Educational Material (cont.) THIRD SESSION: Ways to Price Grain Cash Sale Cash Forward Contract Futures Fix (Hedge to Arrive) Basis Fix Minimum Price Contract Delayed Price Contract Revenue Insurance Coverage Other Methods Delayed Payment Contract Free Storage Pricing Options 1. Pre-harvest Forward Contract Minimum Priced Contract 2. Harvest Cash Sale Minimum Price Contract 3. Post Harvest Storage Delayed Price (DP) 4. Anytime during Marketing Year Futures Fixed Contract (Hedge-to-Arrive) Basis Fixed Contract 6

7 Pre-Harvest Many Unknowns Speculation on size and condition of crop Market volatility Take advantage of opportunities Cash Sale Future + Basis = Cash Price Advantages: Transfer of all price risk Seller locks in both futures and basis No storage costs Shipment of product immediate Seller receives total payment Disadvantages: Give up upside price potential Must lock in current scales at time of delivery 7

8 Cash Forward Contract Future + Basis = Cash Price Allows seller to sell grain grain for future delivery Scales may or may not be able to be set until delivery EX: Contracting new crop many months before harvest begins Cash Forward Contract (con t) Advantages: Transfer futures and basis risk Take advantage of carry in market Can defer income while locking in price No storage cost Disadvantages: Give up upside price potential No payment until delivery Scales left open until delivery 8

9 Hedge To Arrive/ Future Fix Contract Future + No Basis = No Cash Allows farmer to enter into a contract where producer promises to deliver a specific amount of bushels for a specified delivery date by only locking futures price in Eliminates price risk/opportunity while retaining basis risk opportunity Hedge to Arrive (con t) Advantages Locks in acceptable futures price (which reduces the most risky part of the price equation) Leaves basis open to take advantage of possible improvement Seller does not have to guarantee quality until basis is set or delivery Easy to buyback if can t make delivery Can roll to further out month to extend delivery date (cost would be spread between futures contracts) Farmer does not have to pay margin calls on futures position, elevator does on promise of getting the grain 9

10 Hedge to Arrive (con t) Disadvantages Basis must be set by time delivery is made, or close to it Farmer retains basis risk basis could widen Futures could go higher Might have small service charge Best Time to Use When futures is relatively high and basis weak, usually spring time Basis Fixed No futures + Basis = No Cash Sets or locks in only the basis and leaves futures open Eliminates basis risk/opportunity while retaining futures risk and opportunity 10

11 Basis Fixed (con t) Advantages Eliminates basis risk Allows for shipping of grain before futures is set Can receive an advance on contracted bushels No storage costs Scales (premium and discounts) are set Eliminates quality risk in storing grain Allows producer to take advantage of potential futures price increase Can roll the basis contract to extend delivery period (charge will be spread between future contracts) Basis Fixed (con t) Disadvantages Basis and scales (premium and discounts) are set Unlimited risk retained (futures left open) Full payment is not received until futures set Small service fee might apply Best Time to Use When basis is strong and futures have potential to rally, spring and late fall 11

12 Minimum Price Contract Futures locked + Basis locked = Cash set Allows farmer to sell grain at a guaranteed price and leave the door open for an increase in price if futures rally higher Two types of MPC Most popular is to sell cash (minimum price)/buy call (keeps upside potential in market) Buy put (locks in floor) Has service charge and added fee of option premium Minimum Price Contract Call Option Method Advantages Cash price is guaranteed, cannot be reduced if futures decline Basis and scales are set, cannot be changed Full payment on delivery If futures rally, call option premium increases, giving farmer higher cash price Keeps upside potential in market 12

13 Minimum Price Contract Call Option Method (con t) Disadvantages Basis and scales are set, cannot take advantage of improvement Cost of MPC can be expensive, depends on option month and strike price you choose, the farther out in time and closer to futures price the more expensive Can also have an additional service fee If futures market remains unchanged or declines, call option expires worthless, giving farmer their minimum price Minimum Price Contract Put Option Method Allows farmer to lock in a floor price for grain and leave the door open for an increase in price if cash/futures rally Most done through commodity brokers Only will lock in minimum futures price as producer pays premium for level of coverage Give producer the right but not obligation to sell futures contract at strike price Producer retains basis and scale risk 13

14 Minimum Price Contract Put Option Method (con t) Advantages Minimum selling price established Selling price increases if market increases Don t have to guarantee quality Easy to liquidate if don t have production Risk is limited to premium you pay Disadvantage Must pay premium/could be expensive Best Time to Use Early spring when futures are high but uncertain about production Delayed Price Contract No futures + No Basis = No Cash Producer delivers the grain and gives up all rights to the grain Elevator has right to ship grain Producer locks in nothing, futures, basis and sometime scales are left unpriced Producer must take LDP before delivery Best Time to Use Harvest, but most elevators don t offer then Early spring 14

15 Delayed Price Contract (con t) Advantage Ship grain immediately Receive money as soon as sold Eliminates the chance of storage problems Can take advantage of futures and basis improvements Allows to defer income Disadvantage Unlimited price risk Not secured by anything, if elevator folds you lose grain and potential income Futures Futures prices are hardest to peg Items that affect futures Supply and demand fundamentals Technical analysis 15

16 Basic Marketing Plan Sell 1/3 of new crop 4-5 months before harvest. Don t plan to sell at harvest (buy if you need feed for livestock). Sell 2/3 of remaining crop 3 months after harvest. Questions? 16

MARKETING ALTERNATIVES

2018 CONTRACT GUIDE MARKETING ALTERNATIVES We, at Crossroads Cooperative Association, would like to offer various marketing alternatives to our producer customers. Each alternative has its place and value