ECON%20337:

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ECON 337 Agricultural Marketing

Chad Hart Associate Professor chart_at_iastate.edu 51
5-294-9911
Lee Schulz Assistant Professor lschulz_at_iastate.edu
515-294-3356
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Margin Accounts
A margin account is an account that traders
maintain in the market to ensure contract
performance. There are minimum limits on the
size of the account. Crop Trader
Type Initial Maintenance Corn Hedger/Speculator
1,100 1,000 Soybeans Hedger/Speculator 2,475
2,250 Lean Hogs Hedger/Speculator 1,320 1,200
Live Cattle Hedger/Speculator 1,320 1,200 To
trade, you must create a margin account with at
least the Initial amount and maintain at least
the Maintenance amount in the account at the
end of each trading day.
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Margin Calls

• Margin accounts are rebalanced each day
• Depending on the value of futures
• Settlement price
• If your futures are losing value, money is taken
  out of the margin account to cover the loss
• If the account value falls below the
  Maintenance level, you receive a margin call (a
  call to put additional money in your margin
  account) and the balance is brought back up to
  the Initial amount

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Margin Example

• Lets say I went short on Mar. 2015 corn
• 4.02/bushel on Jan. 12
• Along with selling a corn futures contract, I
  have to establish a margin account and deposit
  1,100 in it
• On Jan. 16, the Mar. 2015 corn futures price
  moved to 3.87/bushel
• Since Ill be buying the futures contract later,
  this price move is in my favor

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Margin Example

• I gained 15 cents per bushel and since the
  contract is for 5,000 bushels, thats a gain of
  750
• At the end of the day (Jan. 17), 750 is
  deposited into my margin account, raising the
  account balance to 1,850
• Since 1,850 is greater than the Maintenance
  level, I will not receive a margin call

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Margin Example 2

• Lets say, instead of going short, I went long on
  May 2015 corn
• 4.10/bushel on Jan. 12
• Along with buying a corn futures contract, I have
  to establish a margin account and deposit 1,100
  in it
• On Jan. 16, the May 2015 corn futures price moved
  to 3.9425/bushel
• Since Ill be selling back the futures contract
  later, this price move is not in my favor

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Margin Example 2

• I lost 15.75 cents per bushel and since the
  contract is for 5,000 bushels, thats a loss of
  787.50
• At the end of the day (Jan. 16), 787.50 is to be
  taken from my margin account, lowering the
  account balance to 312.50
• Since 312.50 is less than the Maintenance
  level, I will receive a margin call and be asked
  to deposit 787.50 more into the account or to
  close out the futures position
• The 787.50 brings the account balance back up to
  the initial requirement

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Margin Example Going Short
Date Price Gain Margin Call Account Balance
1/09/15 4.0025 1,100
1/12/15 4.02 -87.50 1,012.50
1/13/15 3.8575 812.50 1,825
1/14/15 3.81 237.50 2,062.50
1/15/15 3.80 50 2,112.50
1/16/15 3.87 -350 1,762.50
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Margin Example Going Long
Date Price Gain Margin Call Account Balance
1/09/15 4.0025 1,100
1/12/15 4.02 87.50 1,187.50
1/13/15 3.8575 -812.50 725 1,100
1/14/15 3.81 -237.50 237.50 1,100
1/15/15 3.80 -50 1,050
1/16/15 3.87 350 1,400
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Market Participants

• Hedgers are willing to make or take physical
  delivery because they are producers or users of
  the commodity
• Use futures to protect against a price movement
• Cash and futures prices are highly correlated
• Hold counterbalancing positions in the two
  markets to manage the risk of price movement

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Hedgers

• Farmers, livestock producers
• Merchandisers, elevators
• Food processors, feed manufacturers
• Exporters
• Importers
• What happens if the futures market is restricted
  to only hedgers?

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Market Participants

• Speculators have no use for the physical
  commodity
• They buy or sell in an attempt to profit from
  price movements
• Add liquidity to the market
• May be part of the general public, professional
  traders or investment managers
• Short-term day traders
• Long-term buy or sell and hold

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Market Participants

• Brokers exercise trade for traders and are paid a
  flat fee called a commission
• Futures are a zero sum game
• Losers pay winners
• Brokers always get paid commission

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Hedging

• Holding equal and opposite positions in the cash
  and futures markets
• The substitution of a futures contract for a
  later cash-market transaction
• Who can hedge?
• Farmers, merchandisers, elevators, processors,
  exporter/importers

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Cash vs. Futures Prices
Iowa Corn in 2014
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• Class web site
• http//www.econ.iastate.edu/chart/Classes/econ337
  /Spring2015/
• See you at lab, Heady 68!