Econ 338C, Spring 2009
ECON 338C:Topics in Grain Marketing
Chad HartAssistant Professor/Grain Markets Specialist
Econ 338C, Spring 2009
Today’s Topic
Farm Financials
&
Homework #1
Econ 338C, Spring 2009
Homework #11. Hedging: Holding equal and opposite positions in the cash and
futures markets.
2. In a hedge the net price will differ from your expected price only by the amount that the actual basis differs from your expected basis.
3. With a put option, the buyer pays the premium and has the right, but not the obligation, to sell a futures contract at the strike price.
4. With a call option, the seller receives the premium and is obligated to sell a futures contract at the strike price if the buyer uses their right.
5. With a call option, the buyer pays the premium and has the right, but not the obligation, to buy a futures contract at the strike price.
6. What is the most common reason crops fail? Drought
Econ 338C, Spring 2009
Homework #17. Expected Local Hedged Price =
Futures Price + Expected Basis – Commission
Corn SoybeansFutures Price $4.2725 $8.92Expected Basis -$0.25 -$0.25Commission -$0.01 -$0.01Expected Local Hedged Price $4.0125 $8.66
Cash Price = Final Futures Price + Actual Basis
Return from the Hedge = Initial Futures Price – Final Futures Price – Commission
Net Price = Cash Price + Return from the Hedge
Econ 338C, Spring 2009
Homework #17. b) 7. c)
Final Futures Price $3.75 $9.75Actual Basis -$0.10 -$0.65Cash Price $3.65 $9.10
Initial Futures Price $4.2725 $8.92Final Futures Price -$3.75 -$9.75Commission -$0.01 -$0.01Return from the Hedge $0.5125 -$0.84
Cash Price $3.65 $9.10Return from the Hedge $0.5125 -$0.84Net Price $4.1625 $8.26
Econ 338C, Spring 2009
Homework #18. a) Floor Price = Strike Price + Basis – Premium – Commission
Strike Price $8.20Expected Basis -$0.25Premium -$0.6325Commission -$0.01Floor Price $7.3075
8. b) A futures hedge (short hedge) or buying any put option at or above a $4.90 strike price will work.
Futures Hedge Put OptionFutures Price $4.2725 Strike Price $4.90Expected Basis -$0.25 Expected Basis -$0.25Commission -$0.01 Premium -$0.97125Net Price $4.0125 Commission -$0.01
Net Price $3.66875
Econ 338C, Spring 2009
Homework #18. c) Buying any call option with a strike price at or below $7.40 will
work.
Ceiling Price = Strike Price + Basis + Premium + Commission
Strike Price $7.40Expected Basis -$0.25Premium $1.85875Commission $0.01Net Price $9.01875
Econ 338C, Spring 2009
Call OptionThe Buyer pays a premium and has the
right, but not the obligation, to buy a futures contract at the strike price.
The Seller receives the premium but is obligated to sell a futures contract at the strike price if the Buyer uses their right.
Econ 338C, Spring 2009
-5.00
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Futures Price, $ per bushel
Net
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er
bush
el
Cash Price Call Option Cost Net Price
Buying a Call Option
Econ 338C, Spring 2009
Selling a Call Option
-5.00
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Futures Price, $ per bushel
Ne
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rice
, $ p
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bu
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Cash Price Call Option Cost Net Price
If futures > strike, Cash – Premium + Commission + Option Payout
If futures < strike, Cash – Premium + Commission
Option Payout = Futures price – Strike price
Econ 338C, Spring 2009
Homework #19. a) Insurance Payment = $4.00/bu * (65% * 200 bu/acre – 122 bu/acre)
= $32 per acre
Insurance Premium = $3.13/acre (from slide)
Net Insurance Payment = $32.00 – $3.13 = $28.87
9. b) Insurance Payment = (65% * 200 bu/acre * $4.04/bu – 122 bu/acre * $3.90/bu) = $49.40 per acre
Insurance Premium = $5.17/acre (from slide)
Net Insurance Payment = $49.40 – $5.17 = $44.23
Econ 338C, Spring 2009
Financial TermsCash Flow – The difference between cash
revenues and expenses moving through the business
Net Worth – Value of assets versus liabilities in the business
Income – The difference between total revenues and expenses moving through the business
Econ 338C, Spring 2009
Estimated 2009 Iowa Corn Costs
Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf
Econ 338C, Spring 2009
Estimated 2009 Iowa Corn Costs
Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf
Econ 338C, Spring 2009
Estimated 2009 Iowa Corn Costs
Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf
Short run, need to cover cash flow costsSeed, fertilizer, chemicals, rent, insurance, etc.
Cash flow costs vary by structureCash renter, Share renter, Owner
Farmer choices: Fertilizer, crop insurance
Econ 338C, Spring 2009
Estimated Iowa Corn Per Acre Costs
Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf
2007 2008 2009
$ per acre
Machinery Costs 100.83 108.48 114.38
Seed, Chemicals, and Fertilizer 197.55 238.67 352.71
Labor 29.29 29.15 29.15
Land 155.00 190.00 205.00
Total 482.67 566.30 701.24
Bushels per acre
Expected Yield 156 157 157
$ per bushel
Cost per Bushel 3.10 3.62 4.48
Econ 338C, Spring 2009
Estimated Iowa Soy Per Acre Costs
Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf
2007 2008 2009
$ per acre
Machinery Costs 46.76 48.50 55.80
Seed, Chemicals, and Fertilizer 107.58 126.06 202.85
Labor 26.95 26.95 26.95
Land 155.00 190.00 205.00
Total 336.29 391.51 490.60
Bushels per acre
Expected Yield 50 50 50
$ per bushel
Cost per Bushel 6.73 7.83 9.81
Econ 338C, Spring 2009
Cash Flow CostsCash Flow Costs: the cash expenses paid to produce and market the crop
Land ownership structure affects cash flow costsRenter, owner, crop-share
Managerial decisions also affect cash flow costsCrop insuranceFertilizerEtc.
Econ 338C, Spring 2009
Cash Flow Costs: Renter vs. Owner
2007 2008 2009
$ per bushel
Corn
Renter 3.10 3.62 4.48
Owner 2.10 2.40 3.16
Soybean
Renter 6.73 7.83 9.81
Owner 3.63 4.03 5.71
Land rent is a cash flow issue for renters. Land owners do not face that cash flow cost.
Econ 338C, Spring 2009
Outlining Cash Flow Needs
What is your production plan?
Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-15.pdf
Econ 338C, Spring 2009
Outlining Cash Flow Needs
What are your cash inflows?
Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-15.pdf
Econ 338C, Spring 2009
Outlining Cash Flow Needs
Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-15.pdf
Econ 338C, Spring 2009
Outlining Cash Flow Needs
Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-15.pdf
Monitoring cash needs within and through the year
A positive cash flow for the year does not imply the farm can not get caught in a cash flow squeeze
Econ 338C, Spring 2009
Items to Consider for Cash Flow Production plan Inventory on hand Input requirements for production Estimated income from production Estimated income from other sources Estimated expenses for production Debt service Non-farm related income and expenses
Econ 338C, Spring 2009
Net Cash Flow for AssignmentCash Market Market in JulyCorn Soybeans Corn Soybeans
Per Acre Cash Flow Costs through Mar. 1 478.50$ 301.43$ 478.50$ 301.43$ Yield 160 46 160 46Per Bushel Cash Flow Costs through Mar. 1 2.99$ 6.55$ 2.99$ 6.55$
Storage Costs since Mar. 1 Date 4/9/2009 4/9/2009 7/1/2009 7/1/2009 Days since Mar. 1 39 39 122 122 Storage Costs (per bushel per day) 0.0006$ 0.0014$ 0.0006$ 0.0014$ Per Bushel Storage Costs 0.02$ 0.05$ 0.07$ 0.17$
Trucking Costs Miles to Market 6 6 6 6 Trucking Costs (per bushel per mile) 0.0060$ 0.0060$ 0.0060$ 0.0060$ Per Bushel Trucking Costs 0.04$ 0.04$ 0.04$ 0.04$
Net Cash Flow Costs 3.05$ 6.64$ 3.10$ 6.76$ Per Bushel Cash Flow Costs through Mar. 1 2.99$ 6.55$ 2.99$ 6.55$ Per Bushel Storage Costs 0.02$ 0.05$ 0.07$ 0.17$ Per Bushel Trucking Costs 0.04$ 0.04$ 0.04$ 0.04$
Econ 338C, Spring 2009
Current Assets and Liabilities
Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-20.pdf
Current assets – cash or assets that can be converted to cash quickly
Current liabilities – debts that are due in a short time
Econ 338C, Spring 2009
Fixed Assets and Liabilities
Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-20.pdf
Fixed assets – assets that will not be sold and are needed to maintain production
Fixed liabilities – debts that are due in a long time
Econ 338C, Spring 2009
Farm Net Worth
Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-20.pdf
Farm Net Worth = Farm Asset Value – Farm Liabilities
Working capital = Current Assets – Current Liabilities Potential cash to cover additional expenses
Econ 338C, Spring 2009
Key Ratios
Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-20.pdf
Current Ratio = Current Assets/Current Liabilities Measures ability to pay debts in the short term Ratio of 2 or higher indicates good ability Ratio of 1 or lower indicates possible issues
Debt-to-Asset Ratio = Total Liabilities/Total Assets Measures credit load versus asset value 30% to 40% is a common value for Iowa farms Farming can be an expensive livelihood and loans often provide the means of conducting it
Econ 338C, Spring 2009
Net Income
Source: Hofstrand, http://www.extension.iastate.edu/agdm/crops/pdf/c3-24.pdf
Income and expenses cover cash and non-cash related transactions. Profits and cash flow are not the same thing.
Econ 338C, Spring 2009
Iowa Averages, 1998-2007
Source: Edwards, http://www.extension.iastate.edu/Publications/FM1845.pdf
Econ 338C, Spring 2009
Iowa Averages, 1990-1998
Source: Edwards, http://www.extension.iastate.edu/Publications/FM1845.pdf
Econ 338C, Spring 2009
Iowa Averages, 1998-2007
Source: Edwards, http://www.extension.iastate.edu/Publications/FM1845.pdf
Econ 338C, Spring 2009
Iowa Corn Prices vs. Costs
Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf
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Season-average Price Cost
Econ 338C, Spring 2009
Iowa Soybean Prices vs. Costs
Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf
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Season-average Price Cost
Econ 338C, Spring 2009
Knowing Your Farm Financials
…Provides you several targets for your marketings
Do prices cover your cash expenses, meeting your cash flow needs?
Do prices cover your total expenses, providing profit and adding to your net worth?
On the production side, we often compare yields to trend; on the marketing side, we need to compare prices to per-unit costs.
Econ 338C, Spring 2009
Class web site:http://www.econ.iastate.edu/classes/econ338C/Hart/
See you next week!
Have a great VEISHEA!