Upload
urbain
View
35
Download
1
Embed Size (px)
DESCRIPTION
ECON 339X: Agricultural Marketing. Chad Hart Assistant Professor/Grain Markets Specialist [email protected] 515-294-9911. HW #1, Contracting Grain, & New Generation Grain Contracts. Today’s Topic. Options. Buy a put. Options. Sell a put. Options. Buy a call. Options. Sell a call. - PowerPoint PPT Presentation
Citation preview
Econ 339X, Spring 2010
ECON 339X:Agricultural Marketing
Chad HartAssistant Professor/Grain Markets Specialist
Econ 339X, Spring 2010
Today’s Topic
HW #1,
Contracting Grain, &
New Generation Grain Contracts
Econ 339X, Spring 2010
Options
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Futures Price
Opt
ion
Ret
urn
Buy a put
Econ 339X, Spring 2010
Options
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Futures Price
Opt
ion
Ret
urn
Sell a put
Econ 339X, Spring 2010
Options
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Futures Price
Opt
ion
Ret
urn
Buy a call
Econ 339X, Spring 2010
Options
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
Futures Price
Opt
ion
Ret
urn
Sell a call
Econ 339X, Spring 2010
Crop Insurance & ACRE7. a) $3.90/bu * (75% * 200 bu/acre – 122 bu/acre) - $6.52/acre
7. b) 75% * 200 bu/acre *$4.20/bu – 122 bu/acre * $4.20/bu - $13.93/acre
8. a) ACRE Rev. Guar. = 90% * $3.83/bu * 171 bu/acre ACRE Farm Rev. Trigger = $3.83/bu * 171 bu/acre + $13.93/acre
8. b) Needed to check both triggers, but ACRE payment rate is based on state level revenues
Econ 339X, Spring 2010
ContractingBasic Hedge-to-ArriveBasisDeferred PriceMinimum PriceNew Generation
Automated PricingManaged HedgingCombination
Econ 339X, Spring 2010
Hedge-to-ArriveAllows producer to lock futures price, but
leaves the basis openBasis is determined at a later date, prior to
delivery on the contractSo the producer still faces basis risk and
production risk (must produce enough crop to cover the contract)
The buyer takes on the futures price risk
Econ 339X, Spring 2010
Hedge-to-ArriveWhy might you use it?
Think basis will strengthen before delivery
For the producer, the gain/loss on the contract is due to basis moves
Available in roll and non-roll varieties
Econ 339X, Spring 2010
Basis ContractAlso known as a “fix price later” contract
Allows producer to lock in basis level, but leaves futures price open
Producer still faces futures price risk and production risk
Buyer takes on basis risk
Econ 339X, Spring 2010
Basis ContractWhy might you use it?
Expect higher futures prices, but possibly weaker basis
ExampleOn July 1, producer sells 5,000 bushels of corn
for November delivery at 20 cents under December futures.
On Nov. 1, Dec. futures set the futures price
Econ 339X, Spring 2010
Deferred Price ContractAlso known as “no price established” contractAllows producer to deliver crop without setting
sales priceBuyer takes delivery and charges fee for
allowing price deferralProducer still faces all price risk and
production risk (if contract is set before delivery)
Econ 339X, Spring 2010
Deferred Price ContractProducer also faces counterparty risk
If buyer files for bankruptcy, the producer becomes an unsecured creditor
Why would you use it?Believe market prices are on the riseTakes care of storageAllows producer to lock prices at a later time
Producer benefits from higher prices and stronger basis, but risks lower prices and weaker basis
Econ 339X, Spring 2010
Minimum Price ContractAllows producer to establish a minimum
price in exchange for a service fee and the cost of an option
The final price is set later at the choice of the producerIf prices are below the minimum price, the
producer gets the minimum priceIf prices are above the minimum price, the
producer captures a higher price
Econ 339X, Spring 2010
Minimum Price ContractRemoves downside price risk (below minimum
price) and allows upside potential (after adjusting for fees)
Producer looking price increases to offset fees
Provides some predictability in pricing, can be set to be cash-flow needs
Econ 339X, Spring 2010
New Generation ContractsEver evolving set of contracts established to
assist producers and users in marketing crops
Structured to overcome marketing challengesInability to follow through on marketingsMarketing decisions triggered by emotionComplexities and costs of marketing tools
Econ 339X, Spring 2010
New Generation ContractsOften broken into three categories
Automated pricingManaged hedgingCombination contracts
Offered by several companies, each with its own twist on the contract
I will highlight some available contracts (for illustrative purposes only, not an endorsement
Econ 339X, Spring 2010
New Generation ContractsThe contract follow predetermined pricing
rules
Often sold in set bushel increments, like futures and options, with a specified delivery period
Some have exit clauses (depending on price)
Econ 339X, Spring 2010
Automated PricingIn its purest form, basically locks in an
average price by marketing equal amounts of grain each period within a set timeCould be daily or weeklySome contracts allow producers to pick the
pricing period
Can be combined with other pricing approaches (minimum price, etc.)
Econ 339X, Spring 2010
Automated PricingExamples
Decision Commodities – Index PricingE-Markets – Market Index ForwardCargill – PacerProCGB – Equalizer Classic
VariationsCGB – Equalizer TraditionalCargill – PacerPro UltraE-Markets – Seasonal Index Forward
Econ 339X, Spring 2010
Automated Pricing
7
8
9
10
11
$ pe
r bus
hel
Futures Price Automated Pricing
Pricing period: Jan. to Mar. 2009 on Nov. 2009 soybean futures
Econ 339X, Spring 2010
Automated PricingAdvantages
Automates marketing decision, frees up producer time
Removes concerns about additional costs (margin calls)
Can be set to capture average price when seasonal highs are usually hit
Econ 339X, Spring 2010
Managed HedgingAutomated contracts that implement pricing
based on recommendations from market analysts
ExampleCargill – MarketPros
Producers can choose to follow CargillPros or Kluis Commodities recommendations
Econ 339X, Spring 2010
Managed HedgingHas many of the same advantages as
automated pricing
Results are dependent on the performance of the market analysts
Often has higher fees than automated pricingAutomated pricing: 3-5 cents/bushelManaged hedging: 10-15 cents/bushel
Econ 339X, Spring 2010
Combination ContractsExtend or combine mechanisms from various
contractsAveraging pricingMinimum pricingPricing based on market movementsOpt-out clauses if prices fall significantly
Come in many varieties, so producers can find one to fit their needs
Econ 339X, Spring 2010
Cargill – DiversiMax Price is set by formula
75% of the price is determined by the average daily high futures price during a specified pricing period
25% of the price is determined by the highest price observed during the pricing period
Can be linked to a commitment to market additional grain (the commitment reduces the fee charged)
Source: http://www.cargillpropricing.com/contracts.html
Econ 339X, Spring 2010
Decision CommoditiesAccelerator Pricing
Markets bushels when prices exceed a floor price, but marketed quantities depend on price level
For example,
Source: http://decisioncommodities.com/products/
If the Nov. 2009 soybean price is
Then we market
< $8.00 0 bushels per day$8.00 to $8.50 100 bushels per day$8.50 to $9.00 250 bushels per day
> $9.00 500 bushels per day
Econ 339X, Spring 2010
Decision CommoditiesTopper Pricing
Markets bushels when prices exceed a floor price on days where prices have jumped sharply
Example: Markets bushels when prices exceed $3.50/bushel on days where prices have increased by at least 15 cents/bushel
Takes immediate advantage of market rallies
Source: http://decisioncommodities.com/products/
Econ 339X, Spring 2010
Decision Commodities
Source: http://decisioncommodities.com/products/
Econ 339X, Spring 2010
Decision Commodities
Source: http://decisioncommodities.com/products/
Econ 339X, Spring 2010
FC StoneAccumulator Contract
Versions for producers and consumers
Key parameters:Accumulator price – price grain is sold (or bought) atKnockout price – price that terminates the contractWeekly bushel sales commitment
Has acceleration function if price move beyond accumulator price
Source: http://www.fcstone.com/content/agriculture/origtools.aspx
Econ 339X, Spring 2010
FC Stone – Accumulator
Source: http://www.fcstone.com/content/agriculture/origtools.aspx
Quantity marketed doubles
Normal quantity marketed
Contract ends
Econ 339X, Spring 2010
FC Stone – Consumer Accumulator
Source: http://www.fcstone.com/content/agriculture/origtools.aspx
Quantity bought doubles
Normal quantity bought
Contract ends
Econ 339X, Spring 2010
Class web site:http://www.econ.iastate.edu/classes/econ339/hart-lawrence/