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ECON 338C: Topics in Grain Marketing. Chad Hart Assistant Professor/Grain Markets Specialist [email protected] 515-294-9911. Price Projections and Issues with an update on the World Ag. Supply & Demand Estimates report. Today’s Topic. Source: USDA, WASDE report, April 2009. - PowerPoint PPT Presentation
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Econ 338C, Spring 2009
ECON 338C:Topics in Grain Marketing
Chad HartAssistant Professor/Grain Markets Specialist
Econ 338C, Spring 2009
Today’s Topic
Price Projections and Issues
with an update on the World Ag. Supply
& Demand Estimates report
Econ 338C, Spring 2009 Source: USDA, WASDE report, April 2009
Econ 338C, Spring 2009 Source: USDA, WASDE report, April 2009
Econ 338C, Spring 2009 Source: USDA, WASDE report, April 2009
Econ 338C, Spring 2009 Source: USDA, WASDE report, April 2009
Econ 338C, Spring 2009
July 2010 Corn Futures
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
3/2
1/2
00
7
5/2
1/2
00
7
7/2
1/2
00
7
9/2
1/2
00
7
11
/21
/20
07
1/2
1/2
00
8
3/2
1/2
00
8
5/2
1/2
00
8
7/2
1/2
00
8
9/2
1/2
00
8
11
/21
/20
08
1/2
1/2
00
9
3/2
1/2
00
9
$ p
er
bu
she
l
Source: CBOT
Econ 338C, Spring 2009
Likely Range
2
3
4
5
6
7
8
3/2
1/2
00
7
6/2
1/2
00
7
9/2
1/2
00
7
12
/21
/20
07
3/2
1/2
00
8
6/2
1/2
00
8
9/2
1/2
00
8
12
/21
/20
08
3/2
1/2
00
9
6/2
1/2
00
9
9/2
1/2
00
9
12
/21
/20
09
3/2
1/2
01
0
6/2
1/2
01
0
$ p
er
bu
she
l
Example: CBOT July 2010 Corn Futures
Econ 338C, Spring 2009
Likely RangeBased on current futures and the option premiums for options on those futures
They determine an implied volatility, a measure of the expected variability of the futures price from the current point on
If you take Econ 437, you’ll learn about the mathematical models used to derive the implied volatility
Given the volatility, we can outline the likely range
Econ 338C, Spring 2009
Pricing Paths
2
3
4
5
6
7
8
3/2
1/2
00
7
6/2
1/2
00
7
9/2
1/2
00
7
12
/21
/20
07
3/2
1/2
00
8
6/2
1/2
00
8
9/2
1/2
00
8
12
/21
/20
08
3/2
1/2
00
9
6/2
1/2
00
9
9/2
1/2
00
9
12
/21
/20
09
3/2
1/2
01
0
6/2
1/2
01
0
$ p
er
bu
she
l
Example: CBOT July 2010 Corn Futures
Econ 338C, Spring 2009
Prices Could Be Higher
2
3
4
5
6
7
8
3/2
1/2
00
7
6/2
1/2
00
7
9/2
1/2
00
7
12
/21
/20
07
3/2
1/2
00
8
6/2
1/2
00
8
9/2
1/2
00
8
12
/21
/20
08
3/2
1/2
00
9
6/2
1/2
00
9
9/2
1/2
00
9
12
/21
/20
09
3/2
1/2
01
0
6/2
1/2
01
0
$ p
er
bu
she
l
Example: CBOT July 2010 Corn Futures
Econ 338C, Spring 2009
… Or Lower
2
3
4
5
6
7
8
3/2
1/2
00
7
6/2
1/2
00
7
9/2
1/2
00
7
12
/21
/20
07
3/2
1/2
00
8
6/2
1/2
00
8
9/2
1/2
00
8
12
/21
/20
08
3/2
1/2
00
9
6/2
1/2
00
9
9/2
1/2
00
9
12
/21
/20
09
3/2
1/2
01
0
6/2
1/2
01
0
$ p
er
bu
she
l
Example: CBOT July 2010 Corn Futures
Econ 338C, Spring 2009
Market SituationReviewing recent past and the current
situation in the marketUsing historical relationships to link
changes in key variables to changes in commodity prices
Evaluating if current relationships differ from historical patterns
Econ 338C, Spring 2009
Market OutlookInterpreting market factors that impact
prices and shape marketing and management decisions
Analyzing how the changing supply and demand factors will impact price
Basing outlook on economic principles, statistical analysis, and market knowledge
Econ 338C, Spring 2009
Market OutlookOutlook depends on timing
Immediate: within a day or a weekShort term: few weeks to few monthsLong term: next growing season to multiple
years
Different information needed for each type
Econ 338C, Spring 2009
Immediate Term Outlook
4.30
4.40
4.50
4.60
4.70
4.80
4.90$
pe
r b
ush
el
Example: CBOT July 2010 Corn Futures
Market timingAny scheduled market movers (USDA reports, etc.)
Econ 338C, Spring 2009
Short Term Outlook
3.50
4.00
4.50
5.00
5.50
6.00$
pe
r b
ush
el
Example: CBOT July 2010 Corn Futures
Prices are adjusting to balance demand with available supplies
One reason to need short term outlook: Storage decisions
Econ 338C, Spring 2009
Long Term Outlook
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
3/3
0/2
00
9
4/3
0/2
00
9
5/3
0/2
00
9
6/3
0/2
00
9
7/3
0/2
00
9
8/3
0/2
00
9
9/3
0/2
00
9
10
/30
/20
09
11
/30
/20
09
12
/30
/20
09
1/3
0/2
01
0
2/2
8/2
01
0
3/3
0/2
01
0
4/3
0/2
01
0
5/3
0/2
01
0
6/3
0/2
01
0
$ p
er
bu
she
l
Example: CBOT July 2010 Corn Futures
Buyers and sellers have time to adjust to changes in prices and quantities.
Important for investment decisions and government policy setting
Econ 338C, Spring 2009
Sources of Outlook InformationPrivate sector market analysis firms
For-profit companies that sell servicesOften more short-term focusedMay be associated with a trading company
In-house analysisOutlook for the company with own staffADM, Cargill, etc.But your local elevator may offer analysis as
well
Econ 338C, Spring 2009
Sources of Outlook Information Land grant universities
Long termExample: Food and Agricultural Policy Research Institute
(FAPRI) Intermediate to short term
Examples: Iowa Farm Outlook (Grain, Livestock, Dairy), Farmdoc.com, Livestock Market Information Center
Often affiliated with university extension services
Commodity organizationsTypically narrowly focused on commodityMay miss breath of outlook
Econ 338C, Spring 2009
Sources of Outlook InformationUSDA Data and Analysis Sources
National Agricultural Statistical Service (NASS)Production, consumption, and survey statistics
Agricultural Marketing Service (AMS)Summaries of local market prices
Economic Research Service (ERS)Analysis of agricultural markets and government
policies
Foreign Agricultural Service (FAS)Trade information and analysis
Econ 338C, Spring 2009
Examples of Outlook Information World Agricultural Supply and Demand
Estimates report http://www.usda.gov/oce/commodity/wasde/latest.pdf
Iowa Farm Outlook http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/
FAPRI Outlook http://www.fapri.missouri.edu/outreach/publications/2009/FAPRI
_MU_Report_01_09.pdf http://www.fapri.iastate.edu/brfbk09/BrfBk2009.pdf
Econ 338C, Spring 2009
U.S. Corn Supply and Use
Source: USDA, WASDE and NASS
2007 2008 2009
Area Planted (mil. acres) 93.5 86.0 85.0
Yield (bu./acre) 150.7 153.9
Production (mil. bu.) 13,038 12,101
Beg. Stocks (mil. bu.) 1,304 1,624
Imports (mil. bu.) 20 15
Total Supply (mil. bu.) 14,362 13,740
Feed & Residual (mil. bu.) 5,938 5,350
Ethanol (mil. bu.) 3,026 3,700
Food, Seed, & Other (mil. bu.) 1,337 1,290
Exports (mil. bu.) 2,436 1,700
Total Use (mil. bu.) 12,737 12,040
Ending Stocks (mil. bu.) 1,624 1,700
Season-Average Price ($/bu.) 4.20 4.20
Econ 338C, Spring 2009
Iowa Farm OutlookMonthly outlook from ISU Extension
Other universities offer similar services
Econ 338C, Spring 2009
FAPRI Reports
U.S. Corn Utilization
World Soybean Production
Source: FAPRI, 2009
Econ 338C, Spring 2009
Evaluating Source of InformationKnow the source of data and analysis
Understand the motivation of the sourcePublic institutionPrivate analysis, for salePrivate analysis, confidential
What are the resources and track record
Econ 338C, Spring 2009
Outlook IssuesEfficient market hypothesis
All available information is quickly factored into the markets and embedded in the price
New information and/or changes in supply and demand after the outlook alter outcomes
Participants react to forecasts
Econ 338C, Spring 2009
Seasonal PatternsA price pattern that repeats itself with some
degree of accuracy year after year.Supplies and demandOften sound reasonsWidely knownLinked to storage cost or basis patterns in
grainsLinked to conception and gestation in livestock
Econ 338C, Spring 2009
Seasonal Pricing Patterns
0.94
0.96
0.98
1.00
1.02
1.04
1.06
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Corn Soy
Source: USDA, NASS,Monthly Price Data 1980-2008
Econ 338C, Spring 2009
Charting
Channel lines
Econ 338C, Spring 2009
Sell Signal
Sell signal
A sell signal is one close below the charting lines
Econ 338C, Spring 2009
Buy Signal
Buy signal
Some chartists need only one close above the charting line to create a buy signal, others use two closes above.
Econ 338C, Spring 2009
Key Reversal
A key reversal is when the daily high and low price range exceed the price range for the previous two days.
Econ 338C, Spring 2009
Gaps
Gaps often occur when a major new piece of information hits the market. They are often filled in by later price movements.
Econ 338C, Spring 2009
Double Tops & Bottoms
Double tops and bottoms show prices with major technical resistance. These can be several days apart.
Econ 338C, Spring 2009
Head & Shoulders
Source: Figure 7, Charting Commodity FuturesAg Decision Maker, File A2-20
Econ 338C, Spring 2009
Moving Averages9 day average18 day average40 day averageSell signal
Buy signals
Econ 338C, Spring 2009
Relative Strength IndexLooks at last X days worth of closing prices
X = 9, 14, 30, etc.Summarizes upward and downward price movements during the period
Record the last 14 days worth of price changes, based on closing pricesSum the positive and negative price changes and create average for eachRelative Strength Index = (Up average/(Up average + Down average))*100
Econ 338C, Spring 2009
Relative Strength Index
Date Prices Price Change Up Down3/16/2009 4.44753/17/2009 4.4425 -0.005 0 0.0053/18/2009 4.4225 -0.02 0 0.023/19/2009 4.51 0.0875 0.0875 03/20/2009 4.5075 -0.0025 0 0.00253/23/2009 4.5 -0.0075 0 0.00753/24/2009 4.4825 -0.0175 0 0.01753/25/2009 4.4125 -0.07 0 0.073/26/2009 4.47 0.0575 0.0575 03/27/2009 4.445 -0.025 0 0.0253/30/2009 4.43 -0.015 0 0.0153/31/2009 4.6075 0.1775 0.1775 04/1/2009 4.52 -0.0875 0 0.08754/2/2009 4.585 0.065 0.065 04/3/2009 4.6 0.015 0.015 0
Averages 0.02875 0.017857
RSI 62
RSI for July 2010 Corn
Econ 338C, Spring 2009
Relative Strength Index
RSI’s above 70 (80) are considered signals of a market due to declineRSI’s below 30 (20) are considered signals of a market due to rally
Econ 338C, Spring 2009
Does Technical Analysis Work?
Arguments for it:Real world markets are not perfectly rationalMarkets may be slow to respond to new informationTechnical analysis works with the psychological biasesIt works because so many people use it
Self-fulfilling
Arguments against:Efficient market hypothesis
The current price holds all of the relevant information
Econ 338C, Spring 2009
Convergence IssuesTypically, as futures contracts reach maturity, futures price and cash prices at delivery points tend to converge to the same level.
For several grain and oilseed futures contracts over the last few years, this has not occurred.
“Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions”Scott Irwin, Philip Garcia, Darrel Good, and Eugene KundaUniversity of Illinois, March 2009
Econ 338C, Spring 2009
Corn (Lack of) Convergence
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Soybean (Lack of) Convergence
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Wheat (Lack of) Convergence
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Why Is Convergence An Issue?
1.Non-convergence indicates the market is out-of-balance.“When a contract is out of balance the disadvantaged side
ceases trading and the contract disappears.” (Hieronymus, 1977)
2.Non-convergence adds to the uncertainty in basis and limits hedging effectiveness.
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Factors The relationship between the spread between
futures contracts and the cost of carry (think storage costs) In the settlement process for corn and soybean futures,
the delivery instrument is a shipping certificate. If it is advantageous to the holder of a shipping
certificate, they can delay delivery and effectively store the grain, paying CBOT set storage costs.
Structural issues related to the delivery process Does the general trade flow of the commodity line up
with the possible delivery points under the futures contract?
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Spread vs. CarryLook at the ratio of the futures spread versus the cost of carry
Futures PriceNext – Futures PriceNearby
Storage Costs + Interest
Irwin, et al. found lack of convergence when ratio is high (> 80%)
A lower ratio implies smaller returns to holding a shipping certificate and more offsetting positions are taken, lowering futures prices.
If the commodity is still in storage, then cash sales aren’t happening, lowering cash prices.
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Delivery Points
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Corn Soybeans Wheat
How much of the commodity is moving through the delivery point areas?
Econ 338C, Spring 2009
Convergence vs. Carry - Corn
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Convergence vs. Carry - Soy
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Possible Reasons for High Ratios1. CBOT storage rates below commercial storage rates
2. Large “long-only” index funds rolling to the next contract at the same time
3. Large risk premiums built into futures to cover uncertainty
Irwin, et al. found support for #1 and arguments for #3, but did not find support for #2.
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Possible Remedies1. Increase CBOT storage rates
Done for corn and soybeans in late 2008
2. Change delivery points to include more of the commodity shipping area Mostly an issue for wheat
Other proposals: Move to cash settlement Force delivery Limit the number of certificates that can be held
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 338C, Spring 2009
Relative Basis Change - Corn
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
The closer this is to one, the more effective hedging is.
Econ 338C, Spring 2009
Relative Basis Change - Soy
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
The closer this is to one, the more effective hedging is.
Econ 338C, Spring 2009
Class web site:http://www.econ.iastate.edu/classes/econ338C/Hart/
See you next week!