Chicago Mercantile Exchange information sources

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Chicago Mercantile Exchange information sources

• http//www.cmegroup.com/tools-information/index.ht
  ml

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Emerging Issues in Futures Markets
CFTC Hearing Last Week

• Failure of convergence
• Prices in delivery period fail to equal cash
  prices
• Volatility of basis in delivery area
• Should a cash-index delivery system be used?
• Hedge Funds
• Are they hedgers? They have no physical market
  position in commodities
• Shift of dominant demand from export market to
  biofuels
• Associated with geographic price center moving
  west
• Future of open-outcry pit trading
• Is electronic trading more efficient?
• Relationship of Chicago to foreign markets
• South America, Tokyo, China, others

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New-Crop Pricing

When is the best chance for
reaching price goals?

What tools will best fit my
needs?

What are the risks?

How much to sell?

• 18-24 months to sell?

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New Crop Corn Seasonal Trend
75 Odds Spring Price Exceeds Harvest Price
CBOT data
Will Biofuels Change This Pattern?
Source U of MN, CFFM, 2007.
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Mid-May
2004
1.63 2.48
Avg. advantage 50 increase in typical
profit Margin.

1. 
   1.41 1.73
2. 
   3.08 2.48
3. 
   3.28 3.88 Avg. 1985-2006
   2.12 2.30

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Gain vs. harvest cash sales, Corn
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Example Put Options Pricing for 2008 Corn

• 4/30/08 Dec. corn close 6.28
• Local elevator fall price 5.73
• Sell 40,000 bu. on elevator contract or
• Buy 6.00 put option _at_ 0.63/bu.
• Local market goes to 6.80/bu. (7.35 Dec.)
• Forward Contract 5.73
• Cash Put 6.80 - 0.63 - .02 6.15
• Local mkt. goes to 4.70
• Cash put 4.70 .75 - .65 cost 4.80

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Crop Reporting Distr.
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Why Marketing is Critical
Typical Corn Net Profit
W
Margin, Past Years .30/bu.
.10 increase in Price 33
W
increase in Net Returns
Also Works in Reverse
W
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Cash-Flow Risk RatioPercent of the crop
required to be sold to cover cash-flow costs

• Formula for computation
• Cash-flow break-even price divided by
  selling price

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Net-Worth Risk Ratio

• The maximum dollars per acre which
• can be lost in any one year before a
  predetermined percentage of the
• equity is lost.

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Cash Flow Break-even Risk Ratio for Soybeans

Partly from Dr. William Edwards, ISU Economics
Department

50/50
1/3-2/3

April 08
Crop

Owners

Renter

Share

Buyer
160.5 523

Cash flow cost per acre
255
503




Govt. payments?
-12
-12
-6
-12




154.5
Cash needed from sales
243
491
511





Expected or actual yield

50
50
25

50
(
bu
.)/





A
Cash flow breakeven price
4.86
9.82
6.18
10.22




11.09
Hedged market price (/
bu
)
11.09
11.09
11.09




Cash flow risk ratio
44



56

92
89

Risk Ratio at 9.60/bu. price
51 102 64 106
Interpretation _at_ 11.09 price, Owners need to
sell 44 of
crop to cover cash-flow needs.
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Calculating Net-Worth Risk Ratio

• Max. dollars of net worth to be
• placed at risk divided by number of
  acres Max. that can be risked per acre
• To compute max. loss per bu. divide /A. by
  normal yld. /bu. that can be risked for
  pre-determined loss of equity

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Mktg. Plan

• Starting point in a mktg plan financial needs of
  the business
• Know your break-even price
• Know your risk-bearing ability
• Plan marketing with a goal of at least covering
  cash-flow needs
• Look for mktg. insurance tools to minimize risk
  of losing the business
• Role of Offer Contracts
• Timing when to pull the trigger to exit

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Key Elements in Grain Contracts

• Quantity quality
• Delivery date
• Delivery location
• Pricing formula
• Quality differentials
• Adjustments if quality is not met
• Date
• Signature of both parties

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Grain Contracts Areas of Risk Exposure

• Price Level
• Basis
• Spreads (Intra-and Inter-Year)
• Options volatility risk
• Production risk
• Counter-party risk
• Control risk
• Tax risk

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Types of conventional grain contracts

• Forward contract establishes price basis
• Delayed price neither is established
• Price later same as above (credit sale)
• Hedge-to-arrive (non-roll) establishes futures,
  but not basis
• Delayed-payment shifts income for tax purposes
• Basis contract establishes basis, not futures
• Minimum-price retains upward flexibility

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Traditional Grain Contracts

• Premium offer contract
• Typically involves sale of options farmer
  potential sale commitment in next season

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How would these factors affect basis?

1. After long delays, farmers have a break in
   weather are busy with spring fieldwork
2. Summer weather has turned quite dry and
   temperatures are 100s across the Corn Belt
3. A hurricane has halted shipments from the U.S.
   Gulf
4. Elevators are piling grain outside
5. A large local feedlot is out of business
6. Rain is delaying harvest
7. Local ethanol plants are short on corn

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If harvest Basis is strong

• Market says sell now
• Is it better to buy futures than store?
• Will cash futures go up in sync.?
• Example Harv. Cash 2.80, July fut.3.55
• Next spring cash 2.95, July fut. 3.20
• Gain from cash storage 0.15
• Gain from July futures?
• Net storage return with 0.22 cost?

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Before Biofuels Boom
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Before Biofuels Boom
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Before Biofuels Boom
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Before Biofuels Boom
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Global forces to cause slowing of corn-based
ethanol growthfrom current 50-60 annual growth

• Corn price
• Ethanol price
• DDG price
• Plant energy costs
• Food feed demand
• Crude oil gasoline prices
• Govt. mandates other policies

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Late Dec. 06
1/29/07
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Figure 2.
72 Potential Iowa Plants 11 Just across IA
Borders
Capacity 159 of 2006 Crop
Iowa Corn Processing Plants, Current
Planned, 7/25/07
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Figure 3.
Total 11,693 mil. Bu.
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Source Dr. Terry Francel, American Farm Bureau
Federation
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What Could Change These Prospects?

• Accelerated corn yield increases
• Crude oil price collapse
• Break-through in economical biomass conversion
• Ethanol import tax removed longer term impacts
• 0.51 blending credit reduced
• Declining livestock feeding

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Key Points

• Starting point in a mktg plan financial needs of
  the business
• Know your break-even price
• Know your risk-bearing ability
• Plan marketing with a goal of at least covering
  cash-flow needs
• Look for mktg. insurance tools to minimize risk
  of losing the business Start Early

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Marketing Tools

• Futures markets
• Options markets
• Elevator contracts
• New-generation contracts
• Storage on off the farm
• Basis as a tool for determining where to
• sell a partial answer to the When to
• sell? question

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10 Traits of a Successful Grain Marketer

1. Starts Early (before planting)
2. Knows production, storage costs risk bearing
   ability
3. Understands basis mkt. carry
4. Follows several relevant markets daily
5. Manages yield risk with revenue insurance
6. Has discipline to price when goals are reached
7. Knows various contracts when to use them
8. Relies on good sources of market information
9. Has an exit plan
10. Keeps marketing records evaluates results

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• World futures markets (Price Discovery)
• Chicagocorn, soft red wheat, soybeans, oats,
  rice
• Kansas City hard red winter wheat
• Minneapolis hard spring and hard white wheat,
  Corn Soybean cash index markets
• Tokyo GMO non-GMO soybeans, corn
• Various other futures markets Argentina, Brazil,
  China, Europe
• Foreign exchange futures

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Overview of Grain Marketing

• Importing port Wilmington, N.C.
• The world markets
• Major grain importing countries Japan, Mex.,
  Taiwan, Korea corn, EU SB
• Import systems infrastructure
• Major grain exporting countries Brazil, Arg.,
  FSU, Canada, E. Europe, China
• Ocean freight (N.Y. Journal of Commerce)
• GMO trends preferences
• Trends in foreign production use
• Trade agreements NAFTA, WTO, possible Latin
  American agreement
• Foreign inspection grading

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Countries requiring GMO labeling
Brazil
Hungary Philippines
U.K.

Greece

Italy
Belgium
Portugal
S. Korea
France
Spain
Japan
Netherlands
Sweden
Czech Rep.
Germany
Finland
Hungary
Luxembourg
Austria
Saudi Arabia
Switzerland
Poland
Japan
Denmark
Australia
Mexico
Ireland
New Zealand
Russia
Paraguay
China
Ethiopia

Slovenia
Thailand
South Africa
Sri Lanka Latvia, Estonia, Slovakia
Lithuania
Taiwan Malaysia
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Key work areas for Grain Merchandisers