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Marketing 101: Lingo!

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Jessica Johnson, UNL Extension Educator - Ag Economics, explains the terminology involved in marketing agricultural crops via futures and options on futures

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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  • 1. MARKETING 101: LINGO! PLEASE READ THE INSTRUCTIONS ON YOUR CARD, DO NOT SHARE YOUR PRICE WITH ANYONE! WE WILL BEGIN SOON!!! Jessica Johnson – Asst. Extension Educator, Agricultural Economics Updated: 2/24/2014
  • 2. Market Lingo 101… Created with WORDLE
  • 3. Marketing 101: Lingo! Futures & Options on Futures Cash Markets
  • 4. Marketing 101: Lingo! Futures & Options on Futures Cash Markets
  • 5. Futures Video http://bcove.me/o73u89sm 01:20 – 2:30 http://bcove.me/zonshves Videos by CME Group
  • 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
  • 7. http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html
  • 8. Market Commentary http://www.youtube.com/watch?v=zsz9ghRdQb4
  • 9. Futures Market January 29, 2014
  • 10. Futures Market January 29, 2014 Corn, March 2014
  • 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!
  • 14. Market Commentary
  • 15. Differences Between Contracts Rural Radio Network Market Quotes http://kneb.com/markets/market-quote.php?page=quote&sym=ZCl
  • 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.
  • 25. http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html
  • 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
  • 28. Call Option Put Option In-the-money Strike Price <Futures price Strike Price >Futures price At-the-money Strike Price = Futures price Strike Price = Futures price Out-of-the-money Strike Price >Futures price Strike Price <Futures price
  • 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
  • 33. Marketing 101: Lingo! Futures & Options on Futures Cash Markets
  • 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
  • 37. Marketing 101: Lingo! Futures & Options on Futures Basis Cash Markets
  • 38. Video by Market Journal http://www.youtube.com/marketjournal
  • 39. Futures Market January 29, 2014 $4.11
  • 40. Futures Market January 29, 2014 $4.11 -0.16 Basis = Local Price – Nearby Futures Price
  • 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
  • 50. Marketing 101: Lingo! Futures & Options on Futures Basis Cash Markets
  • 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. Extension is a Division of the Institute of Agriculture and Natural Resources at the University of NebraskaLincoln cooperating with the Counties and the U.S. Department of Agriculture. University of Nebraska-Lincoln Extension educational programs abide with the non-discrimination policies of the University of Nebraska-Lincoln and the United States Department of Agriculture.