Jessica Johnson, UNL Extension Educator - Ag Economics, explains the terminology involved in marketing agricultural crops via futures and options on futures
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Marketing 101: Lingo!
1. MARKETING 101:
LINGO!
PLEASE READ THE INSTRUCTIONS ON YOUR CARD,
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Jessica Johnson – Asst. Extension Educator, Agricultural Economics
Updated: 2/24/2014
6. Futures Markets
An auction market in which participants buy and sell
standardized future contracts.
Hedgers are people who use the futures or options
as a substitute for buying and selling the actual
commodity
Speculators try to make money buying and selling
futures or options
11. Futures Market
January 29, 2014
Volume = # of contracts traded each day
Open Interest = # of contracts outstanding each day
12. Market Commentary
“Safrina” Crop, is the 2nd Brazilian corn crop. Production from the second corn crop is destined for the export market.
Video by Market Journal http://www.youtube.com/marketjournal
13. Ups and Downs
Bearish Market – Down Market
Bears attack by swiping paws down!
Bullish Market – Up Market
Bulls attack by thrusting horns up!
16. Differences Between Contracts
Carrying Charge – Price difference between the
future delivery month and the near term month. It
represents how much the market is offering
producers to hold (carry) the grain until the distant
month.
Source: Dec. 23, 2010 Grain Transportation Report
17. Differences Between Contracts
Mar. – Dec = 0.108
Rural Radio Network Market Quotes
http://kneb.com/markets/market-quote.php?page=quote&sym=ZC
18. Differences Between Contracts
May – Dec. = 0.194
Rural Radio Network Market Quotes
http://kneb.com/markets/market-quote.php?page=quote&sym=ZC
19. Differences Between Contracts
Small or negative carrying charge → sell
Negative
also called “Inverted”
Lower demand in the future
Large carrying charge → store
More
demand in the future
The carrying charge must be larger than your
estimated storage costs for you to hold the product until
the later date!
20. Hedging
Hedging buying/selling futures contracts to protect
against loss due to changing cash markets.
Taking a position in a futures market opposite the position
held in the cash market
Short – plan to sell a commodity
protects the seller against falling prices
Long – plan to purchase a commodity, protects the buyer
against rising prices
21. Hedging
Hedging buying/selling futures contracts to protect
against loss due to changing cash markets.
Short – plan to sell a commodity, protects the seller against
falling prices
Long – plan to purchase a commodity, protects the buyer
against rising prices
22. Short
Hedging…Buy Low, Sell High
Sell Futures Contract
Long
Place
Buy Futures Contract
Buy Futures
Contract
Lift
Sell Futures
Contract
Sell
Commodity in
Cash Market
Cash Move
Buy
Commodity in
Cash Market
23. Example…Short December Corn
Place Hedge – SELL DEC ‘14 CORN
Lift Hedge – BUY DEC ‘14 CORN
$5.00 Futures Price
$4.00 Futures Price
Gain/Loss
$1.00 Futures Gain
24. Options on Futures
Video http://bcove.me/o73u89sm
2:30
Options give the buyer the right (or option) but not
the obligation to exercise the contract.
26. Put vs. Call Options
Put Option – gives the buyer the right to sell a futures
contract at a predetermined price (aka strike price) on or
before an expiration date.
Insurance against falling price
Minimum price for your commodity
Call Option- Give the buyer the right to buy a futures
contract a specific price (aka strike price) on or before an
expiration date.
Insurance against rising prices
Maximum price for your purchase
27. Price or Premium of the Option, not of the contract.
@CH14
C
4600
Contract
Call or Put
Strike Price
You can find similar information here http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html
29. CALL
PUT
Put vs. Call Options
1. Offset: Sell PUT and get premium
Buy PUT and
pay premium
2. Exercise: SELL underlying futures contract
BUY Back
Futures
SELL in
cash
market
SELL Back
Futures
BUY in
cash
market
3. Expire: Do nothing and lose premium
1. Offset: Sell CALL and get premium
Buy CALL and
pay premium
2. Exercise: BUY underlying futures contract
3. Expire: Do nothing and lose premium
30. Example…Put November Soybeans
Situation
Expire
You expect prices to fall.
-$0.30 buy Premium
+$13.00 sell cash
$12.70 net gain
You buy a $12 strike price
November soybean put
option for a premium of
$0.30.
Prices rise.
The November cash price is
$13.
31. Example…Put November Soybeans
Situation
Offset
You expect prices to fall.
-$0.30 Buy Premium
+$1.30 Sell Premium
$1.00 option gain
+$12.00 cash sale
$13.00 net income
You buy a $12 strike price
November soybean put option
for a premium of $0.30.
Prices are steady but the $12
strike price November put option
premium increases to $1.30.
November cash price $12.00
32. Example…Put November Soybeans
Situation
Exercise
You expect prices to fall.
-$0.30 premium paid
+$12.00 Sell Futures
-$11.00 Buy futures
$0.70 gain from option
$10.50 cash sale
$11.20 net income
You buy a $12 strike price
November soybean put
option for a premium of
$0.30.
The November futures price
drops to $11. You exercise
your put option.
November cash price $10.50
34. Cash Markets
Cash Sale- deliver your crop or livestock to the cash
market, grain elevator or meat packer, and receive
price for the day.
- CME Commodity Trading Manual
Immediate delivery and payment
35. Cash Market INFO
“Cash Grain Reports”
Reported
daily on the
Rural Radio Network
KRVN,
KNEB, KTIC
Western Nebraska Crop Prices
http://kneb.com/index.php?page_id=wzwu7qf6&de
scription=Local_Cash_Grain_Bids
36. Cash Market INFO
USDA AMS Reports
Weekly
reports
Commodities
NE, WH-GR110
W. NE, TO-GR110
Hay
W. NE, TO-GR310
NE & IA, WH-GR310
Nebraska AMS Commodity Report
http://ams.usda.gov
41. Local Price vs. Futures Price = BASIS
Basis – Transportation and handling costs to move
product from current location to point of delivery
Storage
Costs
Expected supply & demand
Transportation services
Variations in grade
Substitutes
Source: Johnson, J., T. Holman and M. Stockton. Historical Crop Prices, Seasonal Patterns and Futures Basis for the Nebraska Panhandle. 1992-2012
42. Local Price vs. Futures Price = BASIS
“Under” – Cash price is less than futures price
Basis
is Negative
Local supply is abundant compared to perceived
demand
“Over” – Cash price is at a above to the futures
price
Basis
is Positive
Local supply limited compared to perceived demand
43. 2013/14 W. NE Corn Basis
Corn Basis
“Over”
2.00
1.50
1.00
0.50
“Under”
0.00
-0.50
-1.00
-1.50
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
2007/08-2012/13 Average Basis
Western Nebraska Basis Patterns
http://panhandle.unl.edu/c/document_library/get_file?uuid=5e6ae9bf-24d1-42a2-8e67-753e71ae81cf&groupId=131817&.pdf
44. Local Price vs. Futures Price = BASIS
“Strong”
Higher
or less negative than
expected
Market IS demanding grain
“Weak”
Lower
or more negative than
expected
Market is NOT demanding grain
Image Source: Google http://www.naomilkoffman.com/2012/03/25/the-opposite-party/
Naomi L. Koffman, Mixed Media Artist
45. 2013/14 W. NE Corn Basis
Corn Basis
2.00
1.50
1.00
0.50
0.00
-0.50
-1.00
-1.50
SEP
OCT
NOV
DEC
JAN
FEB
MAR
2007/08-2012/13 Average Basis
APR
MAY
JUN
JUL
AUG
2013/14
Western Nebraska Basis Patterns
http://panhandle.unl.edu/c/document_library/get_file?uuid=5e6ae9bf-24d1-42a2-8e67-753e71ae81cf&groupId=131817&.pdf
46. Basis Risk
Cash market and futures market do not move at the
same rate and or in the same direction.
47. Example…Short December Corn
Place Hedge – SELL DEC ‘14 CORN
Lift Hedge – BUY DEC ‘14 CORN
$5.00 Futures Price
$4.75 Cash Price
-0.25 Basis
$4.00 Futures Price
$3.75 Cash Price
-0.25 Basis
Net Sale Price
$1.00 Futures Gain
$3.75 Cash Price
$4.75 net price
48. Example…Short December Corn
Place Hedge – SELL DEC ‘14 CORN
Lift Hedge – BUY DEC ‘14 CORN
$5.00 Futures Price
$4.75 Cash Price
-$.25 Basis
$4.00 Futures Price
$3.50 Cash Price
-$.50 Basis
Net Sale Price
$3.50 Cash Price
$1.00 Futures Gain
$4.50 net Price
49. Example…Short December Corn
Place Hedge – SELL DEC ‘14 CORN
Lift Hedge – BUY DEC ‘14 CORN
$5.00 Futures Price
$4.75 Cash Price
-$.25 Basis
$4.00 Futures Price
$3.90 Cash Price
-$.10 Basis
Net Sale Price
$3.90 Cash Price
$1.00 Futures Gain
$4.90 net Price
51. Questions/Comments?
Visit my website now!
Jessica Jo Johnson
Asst. Extension Educator
Office: 308-632-1247
jjohnson@unl.edu
PanhandleAgEcon
go.unl.edu/pagecon
Adopted from: CME commodity Trading Manual
Get current Panhandle price & basis information
TEXT “@UNLPREC” to 651-968-8358
Standard message & data rates apply.
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