Download Agricultural Futures for the Beginner

Understanding Agricultural
Futures
John Hobert
Farm Business Management Program
Riverland Community College
Chicago Board of Trade General
Information Series:
 Introduction
to Futures and Options
Agricultural
Futures for the Beginner
Agricultural Options for the Beginner
Buyers Guide to Managing Price Risk
 Cash
Fundamentals
What’s
in a Price?
Understanding Basis
Chicago Board of Trade General
Information Series Continued:
 Weather
Markets
Weather
and the Corn Market
Weather and the Soybean Market
Weather and the Wheat Market
Exploring the World of Ag
Futures:
 The
Chicago Board of Trade opened in
1848.
 CBT is the world’s leading futures
exchange
 CBT offers a medium for businesses to
offset risks of producing food and
maintain price stability.
The Market Participants:
 Hedgers
 Speculators
Hedgers:
 Farmers
 Country
Elevator Operators
 Processors
 Exporters
 Importers
Speculators:
 General
Public
 Floor Traders
What Exactly are These
Contracts Called Futures:
 “They
are legally binding agreements,
made through a futures exchange, to
buy or sell commodities in the future.”
 “They are standardized in every way
with the exception of price.”
 “They can protect individuals against
dangerous price swings.”
What Exactly are These
Contracts Called Futures:
 “A futures
contract is a firm
commitment to deliver or to receive
specified quantities and grades of a
commodity during a designated month
with price being determined by public
auction(“outcry”) in the pit.”
Using Futures Contracts to Help
Your Business:
 To
price stored grains.
 To price growing crops.
 To price feed grains.
 To gain market information.
 To speculate on $Price Change.
 To plan marketing programs.
Elements of a Futures Contract:
 Quality
 Grade
 Price
 Delivery
Point
 Time of Delivery
Settlement of Futures Contracts:

Offsetting your position in the futures
market.
 Short
Position: Go Long
 Long Position: Go Short

Delivering your Commodity to the delivery
point and meeting the other qualifications of
the futures contract.
The Costs of Futures Contracts:
Commission fees for placing the contract.
 Basis change against your market position.
 Initial Margin money.
 Margin Calls to keep Margin at maintenance
levels.
 Interest.
 Storage.

Typical Margin Requirements:
Grain
Initial Initial Maint Req
Cost/Bu Margin Cost/Bu Maint
Corn
$ .08
$400
$ .06
$300
Oats
$ .05
$250
$ .04
$200
Soybns $ .12
$600
$ .09
$450
Typical Commission Fees:
Grain
Corn
Contract
Contract Size
Commissions
$22.00
5,000 Bu.
Oats
$18.00
5,000 Bu.
Wheat
$22.00
5,000 Bu.
Soybeans
$24.00
5,000 Bu.
Carry or Carrying Charges:
Futures Month Futures Price
Carry
Mar 98
274
May 98
282
8
Jul 98
288 1/4
6 3/4
Sep 98
288 1/4
0
Dec 98
288 1/2
l/4
Futures Market Jargon:
 Basis:
The spread between cash and
futures markets.
 Bull: An individual who thinks prices
will rise.
 Bear: An individual who thinks prices
will decline.
More Futures Market Jargon:
 Cash
Market: A place where actual
commodities are bought and sold.
 Futures Market: A market where
traders buy and sell futures contracts.
 Long: Buyer of futures contract.
 Short: Seller of futures contract.
Future Contract Months Vary
with Grain:
Corn
March
May
July
September
December
Soybeans
March
May
July
August
September
November
January
Wheat
March
May
July
September
December
Futures Contract Quantities Vary
with Produce:
Corn, Oats, Soybeans 5,000 Bushels
Wheat, Winter Wheat, 5000 Bushels
Spring Wheat
Soybean Meal
100 Tons
Soybean Oil
60,000 Pounds
Cattle, Hogs, Pork
Bellies
Feeder Cattle
40,000 Pounds
50,000 Pounds
What determines Basis?
It reflects transportation costs between your
local market and the futures delivery point
specified by the futures contract.
 It reflects the storage and handling costs
until the delivery month of the futures
contract.
 It reflects local supply and demand factors.

Calculating Basis:

A lower cash market(Spot) price minus a
higher futures market price in a given
contract month results in an “under” basis.
 i.e.

2.40 minus 2.70 = basis of .30 under
A higher cash market(Spot) price minus a
lower futures market price in a given
contract month results in an “over” basis.
 i.e.
2.70 minus 2.40 = basis of .30 over
The Long Hedge: (Buying)
June-Cash Market
Plans to purchase
5,000 Bu. Corn at
$2.90 in August
August-Cash Market
Purchases 5,000 Bu.
Corn at $3.40 in the
Cash Market
Futures Market
Buys 1 CBOT Sept.
Corn Futures Contract
at $2.90
Futures Market
Sells 1 CBOT Sept.
Corn Futures Contract
at $3.40
Long Hedge Example Result:
 Purchase
price of Corn=
 Less futures gain
=
 Net Purchase Price
=
 In
$3.40
.50
$2.90
this example, the farmer protected his corn
purchase price by purchasing and selling a
CBOT September Corn Contract.
The Short Hedge: (Selling)
May-Cash Market
Plans to sell 5,000 bu.
Corn at $2.60 in
October
Oct-Cash Market
Sells 5,000 bu. Corn
at $1.90 in the Cash
Market
Futures Market
Sells 1 CBOT Dec.
Corn Futures Contract
at $2.60
Futures Market
Buys 1 CBOT Dec.
Corn Futures Contract
at $1.90
Short Hedge Example Result:
 Sale
Price of Cash Corn =
 Plus Futures Gain
=
 Net Sale Price
=
 In
$1.90
.70
$2.60
this example, the farmer protected his corn
sale price by selling and purchasing a CBOT
December Corn Futures Contract.
Corn Futures Problem 1:
Cash
Market
Futures
Market
October
Store at $2.44
June
Sell at $2.19
October
Sell July at $2.64 - .20
June
Buy July at $2.24 - .05
.25 Loss
.40 Gain
Basis
+ .15
Corn Futures Problem 1 Result:
 Sale
Price of Cash Corn = $2.19
 Plus Futures Gain
=
.40
 Net Sale Price
= $2.59
 In
this example, the Farmer protected his stored
grain by selling and purchasing a CBOT July
Corn Futures Contract.
How Predictable is the Futures
Market?
 “The
Futures Market does not always
move as you might anticipate, but a
hedger’s primary objective is to
achieve price protection.”
Soybean Futures Problem 2:
Cash
Market
Futures
Market
October
Sell at $6.35
November
Price is $6.50
October
Buy Nov at $6.35 + .00
November
Sell Nov at $6.70 - .20
.15 Loss
.35 Gain
Basis
+ .20
Soybean Futures Problem 2
Result:
 Sale
Price of Cash Corn = $6.35
 Plus Futures Gain
=
.35
 Net Sale Price
= $6.70
 In
this example, the Farmer protected his
purchase position by purchasing and selling a
CBOT November Soybean Futures Contract.
Soybean Futures Problem 3:
Cash
Market
Futures
Market
May
Buy at $7.00
November
Price is $6.50
May
Sell Nov at $7.00 + .00
November
Buy Nov at $6.70 - .20
.50 Loss
.30 Gain
Basis
- .20
Soybean Futures Problem 3
Result:
 Sale
Price of Cash Corn = $7.00
 Less Futures Gain
=
.30
 Net Sale Price
= $6.70
 In
this example, the Farmer protected his
purchase position by selling and purchasing a
CBOT November Soybean Futures Contract.