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Agribusiness library

LESSON 060064: Applying Trading Techniques

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Objectives

1. Identify reasons for using futures in agricultural marketing.

2. Determine what to consider when selecting a broker.

3. Determine how to place various types of orders.

4. Investigate the role of a performance bond deposit and bond calls.

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Terms

breakeven cost broker brokerage fee buy stop Commodity Futures

Trading Commission

market order

performance bond performance bond

call price order sell stop stop close only stop order

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Why are futures used in agricultural marketing?

Since the marketing of products can mean the difference between making money and losing money on commodities, it is essential. Many marketing decisions need to be made to ensure existence of the business. Not everyone uses futures to market or buy products. Using or not using is a decision that people have to make when considering their circumstances.

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Why are futures used in agricultural marketing?

A. Prices fluctuate based on many variables. Most of them are out of the control of buyers and sellers. For example, weather, other markets, and seasonal prices cannot be regulated. There may be an effect on the yield and cost of production, but even these

partially controllable factors can vary.

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Why are futures used in agricultural marketing?

1. Many commodities follow a seasonal price pattern based on supply and demand.

a. If there is increased supply and the demand stays the same like at harvest, the price tends to go down.

b. If there is decreased supply and the demand stays the same, the price will go up.

2. By watching the harvest time and the anticipated supply, it is possible to guess what the market will do.

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Why are futures used in agricultural marketing?

3. Unfortunately, there are less predictable markets (e.g., livestock). Even by watching pricing trends for many years, people cannot always accurately predict what the market will do.

a. One year spring may be the highest price season for hogs, and the very next year the spring price may be the lowest of the year.

b. The only consistent thing is that the price tends to follow a cycle.

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Why are futures used in agricultural marketing?

4. By researching previous cycles, people may be able to more accurately predict market prices.5. Overall, the largest thing to consider is the relationship between supply and demand. In the more recent years, this is even volatile because of world markets contributing to the setting of U.S. prices.

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Why are futures used in agricultural marketing?

B. Producers of the products have little control over market prices.

1. They can make decisions on producing or not producing based on production costs, but no

one farmer can determine the market price.2. If the business is small, the producer may not

be able to turn a profit based on operating costs compared to a large business or vice versa.

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Why are futures used in agricultural marketing?

C. Many marketing tools exist, so it is difficult to determine which one is best for an

individual. Some tools are:1. Weather forecasts2. Foreign market analysis3. Cash contracts4. Futures markets5. Price of production6. Price of storage

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Why are futures used in agricultural marketing?

D. The most important thing to consider is the breakeven cost—the amount needed

from the sale of the product to break even in comparison to the input costs.

1. By using cash and futures contracts, a person can lock in a price that he or she knows is profitable to the business.

2. He or she may sell for less than market price in the end, but the amount is guaranteed to cover the cost of production.

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Why are futures used in agricultural marketing?

E. By utilizing product development research and marketing research, an individual can better determine what products consumers want.

1. It is important to look at where the demand will be the greatest now and in the future.

2. If a person does not stay informed with consumer demands and more efficient ways to produce products, he or she may not stay competitive in a volatile market.

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Why are futures used in agricultural marketing?

F. Assuming that the business goal is to obtain maximum profit, a person may need to use

several different marketing tools. It is important to realize that the person will not always receive the maximum price for the product, but there are several ways that he or she can prevent the business from taking a loss.

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What should be considered when selecting a broker?

Most futures trading is conducted over the phone with a broker, so an individual must ensure that the broker will offer honest and knowledgeable advice. In addition, it is important to know that the broker will do exactly what was asked of him or her. A broker is an individual who acts on behalf

of a client who is buying or selling futures or options contracts and more.

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What should be considered when selecting a broker?

A. An individual must first consider—when selecting a broker—what he or she wants to trade.

1. Many brokers specialize in one commodity or another and can better meet certain needs because of extensive knowledge of a specific commodity.

2. Some situations have specific rules and regulations on contracts. A broker who is familiar with the commodity will know these issues more extensively.

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What should be considered when selecting a broker?

B. Trust must be considered.1. If an individual does not trust a broker, how can

he or she be sure the broker is doing exactly what was requested?

2. Even if an individual does trust a broker, it is good business to keep a written record of all the orders given to assist in the event that problems arise.

3. An individual must sign a contract after researching and finding a broker, giving the broker permission to trade commodities.

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What should be considered when selecting a broker?

C. A main factor in selecting a broker is cost.1. In addition to maintaining a margin

requirement, an individual must pay the broker to trade on his or her behalf.

2. A brokerage fee is a fee charged to an individual for each contract that is traded.

3. It is important to consider broker’s fees in addition to interest, margin requirements, and any additional margin that may have to be paid if the market shifts.

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What should be considered when selecting a broker?

D. The length of time in the profession is important when selecting a broker.

1. If a broker is part of a firm, it is important to check references of the firm. People can contact the Commodity Futures Trading Commission, which is the federal regulatory agency for all futures and options contracts traded on organized exchanges.

2. Every year millions of dollars are lost by traders because of the faulty operations of corrupt

individuals.

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How can various types of orders be placed?

Different kinds of orders can be placed with a broker, such as market orders, price orders, stop orders, and stop close only.A. A market order is filled promptly at the current price. This occurs once the broker has been contacted for the order to be placed.

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How can various types of orders be placed?

B. A price order is to sell once filled at the stated price or above. This occurs once an individual instructs the broker to place an order at a certain price.

C. A stop order is to sell once filled at the stated price or below. This occurs once an individual instructs the broker to place an order at a certain price level.

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How can various types of orders be placed?

D. Sell stop orders are below the market, and buy stop orders are above the market.

E. A stop close only is to be filled at the close of trading.

F. The language used during the placement of orders to a broker must be made accurate and clear. It is important to use simple language to avoid the unexpected.

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What is the role of a performance bond deposit and

bond calls?

Performance bond deposits and bond callsA. A performance bond is funds deposited by the

customer, broker, clearing member, or clearinghouse.

1. These funds act as a guarantee that an individual will honor the commitments made in the futures contract.

2. The role of a performance bond allows for assistance to ensure the financial integrity of brokers, clearinghouse members, and the exchange as a whole.

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What is the role of a performance bond deposit and

bond calls?

B. A performance bond call (margin call) occurs when the customer’s positions have lost

money.1. The role of a performance bond call is to increase

deposits up to minimum levels.

2. If the performance bond call is not acted upon, contracts will be closed immediately.

3. Exchanges do not allow trade debts to occur in the futures market.

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Review

Name some marketing tools that can be used to reach maximum profit.

What are the factors to consider when choosing a broker?

What does the Commodity Futures Trading Commission do?

Describe the types of orders learned in this lesson.