commodities trading

1. ECON 337:
Agricultural Marketing
Chad Hart
Associate Professor
chart@iastate.edu
515-294-9911
Lee Schulz
Assistant Professor
lschulz@iastate.edu
515-294-3356

2. Chad Hart
Associate Professor
chart@iastate.edu
515-294-9911
Heady 468E
Lee Schulz
Assistant Professor
lschulz@iastate.edu
515-294-3356
Heady 478D

3. Class Time: TR 9:30-10:20am
Carver 202
Lab Time: T 2:10-4:00pm
Heady 68
Office Hours: By appointment
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2014/

4. Guidelines and rules:
 No cell phone calls or texting in class or lab
 Lab attendance is required, difficult to reschedule
 Class attendance is recommended
Course reading and resource materials will be
available on-line
Grading:
 Two exams 40%
 Three quizzes 15%
 Homework assignments 15%
 Marketing plan project and report 30%

5. Course objectives:
 Understand the use of futures, options, and other
tools in marketing and risk management decisions
 Understand the use of cash sales and contracts
and the role of basis, storage, and transportation in
determining prices
 Know the various sources of agricultural data
information and the roles these data play within the
commodity markets
 Understand the forces that shape commodity
markets and learn about market/price forecasting
 Design an integrated production and marketing
plan for farms and agribusiness

6. Marketing
A series of events and services to create, modify,
and transport a product from initial creation to
consumption
Possible steps:
Planning
Production
Inspection
Transport
Storage
Processing
Sale
Market players:
Producers
Elevators
Processors
Transport companies
Banks/Insurance companies
Traders
Feeders

7. Market Functions
Location
Time
Form
Price discovery
Where do you want it?
When do you want it?
How do you want it?
What will you pay for it?

8. Cash Markets
Local elevators
Ethanol plants & soybean crushers
River terminals
Feeders/feed mills
A market where physical commodities are traded

9. Futures Markets
Chicago: Corn, soybeans, cattle, hogs
Along with wheat (soft red), oats, rice
Kansas City: Wheat (hard red winter)
Minneapolis: Wheat (hard red spring)
Tokyo: Corn, soybeans, coffee, sugar
Has a market for Non-GMO soybeans
Other markets in Argentina, Brazil, China, and Europe
A market where contracts for physical commodities are
traded, the contracts set the terms of quantity, quality,
and delivery

10. The Cash and Futures Markets Are Related
Basis = Cash price – Futures price
Rearranging terms:
Cash price = Futures price + Basis
So national (and international) events can
affect local prices

11. Market Activities
Pricing the commodity
Establishing contracts
Merchandising the commodity among uses
Transporting the products
Storing the products
Managing and controlling the products
Managing production and price risks

12. Price Determination and Discovery
Price Determination
– is the broad forces of supply and demand
establishing a market clearing price for a
commodity.
Price Discovery
– is the process by which buyers and sellers
arrive at a specific price for a given lot of
produce at a given location for a specific
time period.

13. Price Determination and Price Discovery
S
D
P
Q
Pe
Qe

14. Futures Markets
Organized and centralized market
Today’s price for products to be delivered
in the future
A mechanism of trading promises of future
commodity deliveries among traders

15. Futures and Options
Market tools to help manage (share) price
risks
Mechanisms to establish commodity
trades among participants at a future time
Available from commodity exchanges /
futures markets

16. Agricultural Futures Markets
Has some unique features due to the nature of agricultural
businesses
Supply comes online a few times during the year
So at harvest, supply spikes, then diminishes until the
next harvest
Production decisions are based price forecasts
Planting decisions can be made a full year (or more)
before the crop price is realized
Users provide year-round demand
Livestock feeding, biofuel production, food demand

17. Futures Market Exchanges
Competitive markets
Open out-cry and electronic trading
Centralized pricing
Buyers and sellers are both in the market
Relevant information is conveyed through the bids
and offers for the trades
Bid = the price at which a trader would buy the
commodity
Offer = the price at which a trader would sell the
commodity

18. Futures Market Exchanges
Modern futures market began long ago
1848 -- Chicago Board of Trade
1898 -- Chicago Mercantile Exchange
2007 -- CME Group merged CBOT and CME
Highly regulated markets
Commodity Futures Trading Commission
(CFTC)

19. The View from the Corn Pit
Source: M. Spencer Green, AP Photo