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Course Topics Overview of food chain structure and coordination - inputs through retail food Wholesale and retail marketing activities, processing, transportation, margins
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Economics 235 Introduction to Agricultural Marketing
John D. LawrenceSpring 2008
Course Overview
An overview of agricultural and food markets and marketing systems and how these are evolving in a rapidly changing global market place.
Course Topics
Overview of food chain structure and coordination - inputs through retail food
Wholesale and retail marketing activities, processing, transportation, margins
Course Topics Farm-level price behavior, pricing
systems, and marketing management
Price analysis, futures, options, contracts, and cooperatives
The role of government in agricultural markets
Course Objectives Understand practical marketing problems
and issues affecting: The “bottom line” of a business! How the system operates and how well! Resource allocation and efficiency!
Use principles to evaluate current events Ask and answer, “So what?”
Course Procedures
Discussion/ lecture combination. Read or complete the assignments
before coming to class. Apply principles in analyzing new
marketing issues or problems.
Resource Materials Class notes Reading assignments on web Basic text for the course:
The Agricultural Marketing System Guest speakers occasionally No cell phones!!!!!
One Required Lab
Market simulation One evening 6-9 pm Two nights to choose from
Tentatively late February
Class Web Site http://www.econ.iastate.edu/
classes/235 http://www.econ.iastate.edu/
faculty/lawrence/ Notes posted
Presentations can be downloaded and printed Resource materials and links Secrets are in the lectures!!!
Contacting Instructor
John Lawrence 468 Heady Hall, 294-6290 [email protected] Office hours: by appointment
Juan Murguia 294-6740 [email protected]
Grading
Two mid-term tests 40% Final exam 20% Homework, quizzes, project
and class participation40%
Grading Procedures
Homework due in class on assigned date 10% per day late penalty
Test and quizzes will be announced in class If you know you will be gone make
arrangements ahead of time
Class Project Team project Farm level analysis
Marketing plan Contract evaluation Strategic decision
Weekly Market Report Pick a commodity to follow all
semester Corn, Soybeans, Cattle, Hogs Weekly summary due each Tuesday Less than one page
Price change Margin account Market news
10 points per week possible
Definition A market is an arena for
organizing and facilitation business activities.
Define a market Form What Place Where Time When
Cash or Spot Market When: Immediate or near-term delivery What: Commodities
Defined by minimum standards Often set by USDA
Where: Typically at buyer’s location Elevator, processor, auction
Cash or Spot Market Examples
#2 yellow corn, Heartland Coop at Nevada, January 4, 2008, farmer to first handler.
#1 yellow soybeans, north central Iowa elevators, January 4, 2008, farmer to first handler.
Fed cattle 65-80% Choice, Nebraska feedlots, January 7, 2008, feedlot to packer
Iowa-S. Minnesota 51-52% Lean hogs, plant delivered, January 7, 2008, farmer to packer.
Medium-Large Frame steers 600-650 pounds, Dunlap Iowa Auction, January 3, 2008, cowherds to feedlots.
Futures markets Today’s price for products to be delivered in the
future. A mechanism of trading promises of future
commodity deliveries among traders. Biological nature of ag production
Prices not known when production decision is made
Processors need year around supply
Futures Market Exchanges
12 organized exchanges Two largest
Chicago Board of Trade (CBOT) Grains, interest rates http://www.cbot.com/
Chicago Mercantile Exchange (CME) Livestock, financial, currencies http://www.cme.com/
Combined for 75% of futures volume
Semester long assignment Choose and follow a commodity each week
throughout the semester. Due each Tuesday
Report the price, price change and calculate your margin account based on Friday’s close.
Brief (less than one page) analysis of factors that impacted the market the previous Monday – Friday
Sources for information Links also on class web site Cash
http://www.ams.usda.gov/LSMNpubs/index.htm Futures
http://www.cme.com/ Right-side menu “VIEW ALL DELAYED QUOTES” Then left-side menu “CME Commodities”
http://www.cbot.com/ Right-side menu
Analysis http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/
January 4th, 2008 issue has several suggestions for information http://www.lmic.info/memberspublic/membersreports.html http://www.tfc-charts.w2d.com/custom_menu.php3
Due Tuesday Jan 22 Pick a commodity Define the cash market and report the
price. Find and report the futures price for the
same commodity for Friday. Choose a contract month that expires after
the end of the class. July or later for corn, wheat, or soybeans June or later for cattle, feeder cattle and hogs
Futures Market Exchanges
Trading pits Centralized pricing
Buyers and sellers represented All information represented
Perfectly competitive market Open out-cry trading
The futures contract
A legally binding contract to make or take delivery of the commodity Form (wt, grade, specifications) Time (delivery date) Place (delivery location) Possession (seller delivers, buyer
receives)
The futures contract Standardized contract No physical exchange takes place
when the contract is traded. Deliveries are made when the
contract expires (delivery time) Payment is based on the price
established when the contract was initially traded.
Standardized contract Certain delivery (contract) months Fixed size of contract
Grains 5,000 bushels Livestock in pounds
Lean Hogs 40,000 lbs carcass Live Cattle 40,000 lbs live Feeder Cattle 50,000 lbs live
Specified delivery points Relatively few delivery points
Market position Objective: Buy low, sell high You can either buy or sell initially
Sell a December Corn contract initially Deliver corn in December OR, Buy back at a later date
Buy a February Live Cattle contract initially
Take delivery of cattle in February OR, Sell back at a later date
Margin account Highly leveraged trades
Margin is the earnest money that must be maintained in the trader’s account
Often 5-10% of full value Margin account settled everyday
Must maintain account balance Margin call
Calculate as if you had to get out of the market every day.
Margin Account Example Corn Contract
5,000 bushels @ $2.80 = $14,000 Margin = $500
Cattle contract 40,000 pounds @ $.70 = $28,000 Margin $1,000
Margin Account
Initial margin: The amount needed to open and account.
Maintenance margin: The minimum amount needed to keep and account open.
“Mark to the Market” at the close of each trading day.
Margin Account Example
Initial margin$1,000
Maintenance margin$800
Corn contract (5000 bushels) Day 1: Sell at 4.55
Margin Account Example
Day Price ChgG/LMargin1 4.54 +.01+5010502 4.58 -.04-2008503 4.61 -.03-150700Below Maintenance Margin. Must make $300 margin call to restore to initial margin
10004 4.52 +.09+4501450Changes reflect the initial “sell” of the contract