ECON 339X: Agricultural Marketing

transcript

Econ 339X, Spring 2010

ECON 339X:Agricultural Marketing

Chad HartAssistant Professor/Grain Markets Specialist

chart@iastate.edu515-294-9911

Today’s Topic

HW #1,

Contracting Grain, &

New Generation Grain Contracts

Options

Futures Price

Buy a put

Options

Futures Price

Sell a put

Options

Futures Price

Buy a call

Options

Futures Price

Sell a call

Crop Insurance & ACRE7. a) $3.90/bu * (75% * 200 bu/acre – 122 bu/acre) - $6.52/acre

7. b) 75% * 200 bu/acre *$4.20/bu – 122 bu/acre * $4.20/bu - $13.93/acre

8. a) ACRE Rev. Guar. = 90% * $3.83/bu * 171 bu/acre ACRE Farm Rev. Trigger = $3.83/bu * 171 bu/acre + $13.93/acre

8. b) Needed to check both triggers, but ACRE payment rate is based on state level revenues

ContractingBasic Hedge-to-ArriveBasisDeferred PriceMinimum PriceNew Generation

Automated PricingManaged HedgingCombination

Hedge-to-ArriveAllows producer to lock futures price, but

leaves the basis openBasis is determined at a later date, prior to

delivery on the contractSo the producer still faces basis risk and

production risk (must produce enough crop to cover the contract)

The buyer takes on the futures price risk

Hedge-to-ArriveWhy might you use it?

Think basis will strengthen before delivery

For the producer, the gain/loss on the contract is due to basis moves

Available in roll and non-roll varieties

Basis ContractAlso known as a “fix price later” contract

Allows producer to lock in basis level, but leaves futures price open

Producer still faces futures price risk and production risk

Buyer takes on basis risk

Basis ContractWhy might you use it?

Expect higher futures prices, but possibly weaker basis

ExampleOn July 1, producer sells 5,000 bushels of corn

for November delivery at 20 cents under December futures.

On Nov. 1, Dec. futures set the futures price

Deferred Price ContractAlso known as “no price established” contractAllows producer to deliver crop without setting

sales priceBuyer takes delivery and charges fee for

allowing price deferralProducer still faces all price risk and

production risk (if contract is set before delivery)

Deferred Price ContractProducer also faces counterparty risk

If buyer files for bankruptcy, the producer becomes an unsecured creditor

Why would you use it?Believe market prices are on the riseTakes care of storageAllows producer to lock prices at a later time

Producer benefits from higher prices and stronger basis, but risks lower prices and weaker basis

Minimum Price ContractAllows producer to establish a minimum

price in exchange for a service fee and the cost of an option

The final price is set later at the choice of the producerIf prices are below the minimum price, the

producer gets the minimum priceIf prices are above the minimum price, the

producer captures a higher price

Minimum Price ContractRemoves downside price risk (below minimum

price) and allows upside potential (after adjusting for fees)

Producer looking price increases to offset fees

Provides some predictability in pricing, can be set to be cash-flow needs

New Generation ContractsEver evolving set of contracts established to

assist producers and users in marketing crops

Structured to overcome marketing challengesInability to follow through on marketingsMarketing decisions triggered by emotionComplexities and costs of marketing tools

New Generation ContractsOften broken into three categories

Automated pricingManaged hedgingCombination contracts

Offered by several companies, each with its own twist on the contract

I will highlight some available contracts (for illustrative purposes only, not an endorsement

New Generation ContractsThe contract follow predetermined pricing

Often sold in set bushel increments, like futures and options, with a specified delivery period

Some have exit clauses (depending on price)

Automated PricingIn its purest form, basically locks in an

average price by marketing equal amounts of grain each period within a set timeCould be daily or weeklySome contracts allow producers to pick the

pricing period

Can be combined with other pricing approaches (minimum price, etc.)

Automated PricingExamples

Decision Commodities – Index PricingE-Markets – Market Index ForwardCargill – PacerProCGB – Equalizer Classic

VariationsCGB – Equalizer TraditionalCargill – PacerPro UltraE-Markets – Seasonal Index Forward

Automated Pricing

Futures Price Automated Pricing

Pricing period: Jan. to Mar. 2009 on Nov. 2009 soybean futures

Automated PricingAdvantages

Automates marketing decision, frees up producer time

Removes concerns about additional costs (margin calls)

Can be set to capture average price when seasonal highs are usually hit

Managed HedgingAutomated contracts that implement pricing

based on recommendations from market analysts

ExampleCargill – MarketPros

Producers can choose to follow CargillPros or Kluis Commodities recommendations

Managed HedgingHas many of the same advantages as

automated pricing

Results are dependent on the performance of the market analysts

Often has higher fees than automated pricingAutomated pricing: 3-5 cents/bushelManaged hedging: 10-15 cents/bushel

Combination ContractsExtend or combine mechanisms from various

contractsAveraging pricingMinimum pricingPricing based on market movementsOpt-out clauses if prices fall significantly

Come in many varieties, so producers can find one to fit their needs

Cargill – DiversiMax Price is set by formula

75% of the price is determined by the average daily high futures price during a specified pricing period

25% of the price is determined by the highest price observed during the pricing period

Can be linked to a commitment to market additional grain (the commitment reduces the fee charged)

Source: http://www.cargillpropricing.com/contracts.html

Decision CommoditiesAccelerator Pricing

Markets bushels when prices exceed a floor price, but marketed quantities depend on price level

For example,

Source: http://decisioncommodities.com/products/

If the Nov. 2009 soybean price is

Then we market

< $8.00 0 bushels per day$8.00 to $8.50 100 bushels per day$8.50 to $9.00 250 bushels per day

> $9.00 500 bushels per day

Decision CommoditiesTopper Pricing

Markets bushels when prices exceed a floor price on days where prices have jumped sharply

Example: Markets bushels when prices exceed $3.50/bushel on days where prices have increased by at least 15 cents/bushel

Takes immediate advantage of market rallies

Decision Commodities

FC StoneAccumulator Contract

Versions for producers and consumers

Key parameters:Accumulator price – price grain is sold (or bought) atKnockout price – price that terminates the contractWeekly bushel sales commitment

Has acceleration function if price move beyond accumulator price

Source: http://www.fcstone.com/content/agriculture/origtools.aspx

FC Stone – Accumulator

Quantity marketed doubles

Normal quantity marketed

Contract ends

FC Stone – Consumer Accumulator

Quantity bought doubles

Normal quantity bought

Contract ends

Class web site:http://www.econ.iastate.edu/classes/econ339/hart-lawrence/

ECON 339X: Agricultural Marketing

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