Transcript Chicago Mercantile Exchange information sources http://www.cmegroup.com/toolsinformation/index.html Emerging Issues in Futures Markets CFTC Hearing Last Week • Failure of convergence – Prices in delivery period fail.

Chicago Mercantile Exchange
information sources
http://www.cmegroup.com/toolsinformation/index.html
Emerging Issues in Futures Markets
CFTC Hearing Last Week
• Failure of convergence
– Prices in delivery period fail to equal cash
prices
– Volatility of basis in delivery area
– Should a cash-index delivery system be used?
• “Hedge” Funds
– Are they hedgers? They have no physical
market position in commodities
• Shift of dominant demand from export
market to biofuels
– Associated with geographic price center moving
west
• Future of open-outcry pit trading
– Is electronic trading more efficient?
• Relationship of Chicago to foreign markets
– South America, Tokyo, China, others
An Eagle Vision Marketing contract would have given
you the following futures prices through March 31,
2008: (excluding service fees)
Corn
ProPricing
7 Signed up A+
in Fall 06
Cargill
AgHorizons Brock
Pros
Northland
May 2008 4.06 ½
4.42 ¼
3.80
Jul
2008 4.10 ½
4.54
Sep
2008
4.69 ¾
Dec
2008
4.67 ½
Corn
ProPricing
8 Signed
A+
up in Fall
07
3.57 ¼
4.02 ¼
4.10 ¾
3.83
4.10 ¼
Cargill
AgHorizons Northland Utterback
Pros
Sep 2008 5.96 ¾
5.90
6.26 ½
5.54 ¼
Dec 2008 5.96
5.89
5.99
5.52 ¾
Mar 2009 6.04
6.00 ¼
6.03 ¼
5.66 ¾
May 2009 6.07 ¼
6.11 ¼
6.37 ½
5.56
Jul
6.18
6.39 ½
5.95 ¼
5.70
5.39 ½
2009 6.09 ½
Sep 2009
5.90
Dec 2009
5.71 ¾
Soybeans
ProPricing Cargill
7 Signed up AgHorizons Brock
in Fall 06
Pros
Northland
Jul
2008 18.03 ½
8.53 ½
10.32 ½
Nov
2008 15.93 ½
7.48
9.07 ¾
Soybeans
ProPricing Cargill
8 Signed up AgHorizons Northland Utterback
in Fall 07
Pros
Nov
2008 12.23 ¾
13.41 ½
10.89 ½
Jan
2009 12.45 ¼
13.37 ¾
10.55 ½
Jul
2009 13.20 ½
13.31 ½
12.96 ½
Nov
2009 11.97 ½
12.60
10.97 ¾
New-Crop Pricing
• When is the best chance for
reaching price goals?
• What tools will best fit my
needs?
• What are the risks?
• How much to sell?
•
18-24 months to sell?
New Crop Corn Seasonal Trend
75% Odds:
Spring Price
Exceeds
Harvest Price
CBOT data
Will Biofuels Change This Pattern?
Source: U of MN, CFFM, 2007.
Mid-May
2004
2005
2006
2007
Avg. 1985-2006
1.63
2.48
1.41
3.08
1.73
2.48
3.28
2.12
3.88
2.30
Avg. advantage
=50% increase
in typical profit
Margin.
Gain vs. harvest cash sales, Corn
Example Put Options Pricing for 2008 Corn
•
•
•
•
•
•
•
•
•
4/30/08 Dec. corn close
$6.28
Local elevator fall price
5.73
Sell 40,000 bu. on elevator contract or
Buy $6.00 put option @ $0.63/bu.
Local market goes to $6.80/bu. ($7.35 Dec.)
Forward Contract = $5.73
Cash + Put = $6.80 - $0.63 - .02 = $6.15
Local mkt. goes to $4.70
Cash + put = 4.70 + $.75 - $.65 cost = $4.80
Illinois Corn Yields
Drought Tolerant?
Crop Reporting Distr.
•
•
•
•
•
•
NW
NE
WEST
E.SE.
SW
SE
2004
184
174
192
175
158
158
2005
140
129
141
139
133
130
% chg.
-24
-26
-27
-21
-16
-18
Net-Worth Risk Ratio
• The maximum dollars per acre which
can be lost in any one year before a
predetermined percentage of the
equity is lost.
Cash Flow Break-even & Risk Ratio for Soybeans
Partly from Dr. William Edwards, ISU Economics Department
April 08
50/50
Crop 1/3-2/3
Owners Renter Share Buyer
Cash flow cost per acre
$255 $503 $160.5
Govt. payments?
-$12 -$12 -$6
Cash needed from sales
$243 $491 $154.5 $511
Expected or actual yield (bu.)/A 50
50
25
$523
-$12
50
Cash flow breakeven price
$4.86 $9.82 $6.18 $10.22
Hedged market price ($/bu)
$11.09 $11.09 $11.09 $11.09
Cash flow risk ratio
44%
89% 56%
92%
Risk Ratio at $9.60/bu. price
51%
102%
106%
64%
Interpretation: @ $11.09 price, Owners need to sell 44% of
crop to cover cash-flow needs.
Calculating Net-Worth Risk Ratio
• Max. dollars of net worth to be
placed at risk divided by number
of acres = Max.$ that can be
risked per acre
• To compute max. loss per bu. :
divide $/A. by normal yld. =
$/bu. that can be risked for predetermined loss of equity
Mktg. Plan
• Starting point in a mktg plan: financial
needs of the business
• Know your break-even price
• Know your risk-bearing ability
• Plan marketing with a goal of at least
covering cash-flow needs
• Look for mktg. & insurance tools to
minimize risk of losing the business
• Role of Offer Contracts
• Timing: when to pull the trigger & to exit
Key Elements in Grain Contracts
• Quantity & quality
• Delivery date
• Delivery location
• Pricing formula
• Quality differentials
• Adjustments if quality is not met
• Date
• Signature of both parties
Grain Contracts: Areas of Risk
Exposure
• Price Level
• Basis
• Spreads (Intra-and Inter-Year)
• Options volatility risk
• Production risk
• Counter-party risk
• Control risk
• Tax risk
Types of conventional grain contracts
• Forward contract: establishes price &
basis
• Delayed price: neither is established
• Price later: same as above (credit sale)
• Hedge-to-arrive (non-roll): establishes
futures, but not basis
• Delayed-payment: shifts income for tax
purposes
• Basis contract: establishes basis, not
futures
• Minimum-price: retains upward flexibility
Traditional Grain Contracts
•Premium offer contract
•Typically involves sale of
options & farmer potential
sale commitment in next
season
How would these factors affect
basis?
1. After long delays, farmers have a break in
weather & are busy with spring fieldwork
2. Summer weather has turned quite dry and
temperatures are 100s across the Corn
Belt
3. A hurricane has halted shipments from the
U.S. Gulf
4. Elevators are piling grain outside
5. A large local feedlot is out of business
6. Rain is delaying harvest
7. Local ethanol plants are short on corn
If harvest Basis is strong
• Market says sell now
• Is it better to buy futures than store?
• Will cash & futures go up in sync.?
• Example: Harv. Cash 2.80, July fut.3.55
• Next spring: cash 2.95, July fut. 3.20
• Gain from cash storage: $0.15
• Gain from July futures?
• Net storage return with $0.22 cost?
Before Biofuels Boom
Before Biofuels Boom
Before Biofuels Boom
Before Biofuels Boom
Global forces to cause slowing of
corn-based ethanol growth
from current 50-60% annual growth
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•
•
•
•
•
•
Corn price
Ethanol price
DDG price
Plant energy costs
Food & feed demand
Crude oil & gasoline prices
Govt. mandates & other
Late Dec. ‘06
1/29/07
Figure 2.
72
Plants
66Potential
Planned +Iowa
current
in Iowa
63
11Just
Just across
across the
borders
11
IA Borders
*
*
*
*
*
* HowardWinnesh
Osceola
* DickensonEmmet
* Mitchell
* WinnebagoWorth
Allamakee
iek
*
O’Brien Clay Palo
* Kosuth Hancoc * Floyd
Sioux*
* * *Chickasaw Fayette
C
erroG
ordo
Alto
*
k
Clayton
Humbol
Cherokee
* BuenaV*ista Pocahontas dt* *Wright Franklin Butler Bremer
Plymouth
*
*
*
Delawa
*
BlackHawk Buchana
*a Sac Calhoun Webster
* Hamilton
Woodbury Id
*
re
*
Hardin
Grundy
n
*
*
*
*
Lyon
Tama
*
Monona Crawford Carroll Greene
*
*
*
Shelby Audubon Guthrie
*Pottawattamie
Mills
*
Fremont
Figure 1.
*
*
Montgomery
*Page
Adair
Cass
*
Adams
Boone
*
*
Harrison
*
Story
r
*
Union
Marshal
l
*
Dalla Polk
s
Madis
on
Jasper
Linn
Jackson
Jones
* ** **
*
Poweshiek
Johnson
Cedar
Iowa
*
Mucatine
Warren
Clarke
Benton
n
Dubuque
*
Marion Mahask Keokuk
a
Lucas Monroe
Taylor Ringgold Decatur Wayne
Appanoose
*Wapello
Davis
*
Scott *
Clinton
n
Washington
Jefferson
Louisa
Henry
*
DesMoines
VanBuren Lee
Capacity: 159%
129% of
Capacity:
of 2006
2006crop
Crop
*
corn
processing
&
plants,
current
&&planned,
06
Iowa
processing
& ethanol
ethanol
plants,
current
planned,
10/26/06
Iowa
Corn
Processing
Plants,
Current
& Actual
Planned,
7/25/07
Iowa
Corn
Processing
& Ethanol
Plant
Locations,
Locations,
Actual
&
& Planned
Planned.
, 11/20/
. 9/26/06
Figure 3.
Total 11,693 mil. Bu.
What Could Change These Prospects?
• Accelerated corn yield increases
• Crude oil price collapse
• Break-through in economical
biomass conversion
• Ethanol import tax removed – longer
term impacts
• $0.51 blending credit reduced
• Declining livestock feeding
Key Points
• Starting point in a mktg plan:
financial needs of the business
• Know your break-even price
• Know your risk-bearing ability
• Plan marketing with a goal of at
least covering cash-flow needs
• Look for mktg. & insurance tools to
minimize risk of losing the
business
Start Early
Marketing Tools
•
•
•
•
•
•
Futures markets
Options markets
Elevator contracts
New-generation contracts
Storage on & off the farm
Basis as a tool for determining where to
sell & a partial answer to the “When to
sell?” question
Ways of Using Basis
information for farmer
marketing
• For evaluating forward
contracts
• For pre-harvest & storage
hedging decisions
• For market signals
• For decisions about
ownership of grain or options
10 Traits of a Successful
Grain Marketer
1. Starts Early (before planting)
2. Knows production, storage costs & risk
bearing ability
3. Understands basis & mkt. carry
4. Follows several relevant markets daily
5. Manages yield risk with revenue insurance
6. Has discipline to price when goals are reached
7. Knows various contracts & when to use them
8. Relies on good sources of market information
9. Has an exit plan
10. Keeps marketing records & evaluates results
Countries requiring GMO labeling
Brazil
Hungary
U.K.
Greece
Belgium
Portugal
France
Spain
Netherlands
Sweden
Germany
Finland
Luxembourg Austria
Switzerland
Poland
Denmark
Australia
Ireland
New Zealand
Paraguay
China
Slovenia
Thailand
Sri Lanka
Taiwan
Latvia, Estonia, Slovakia
Philippines
Italy
S. Korea
Japan
Czech Rep.
Hungary
Saudi Arabia
Japan
Mexico
Russia
Ethiopia
South Africa
Malaysia
Lithuania
Calculating Soybean Crush Margins
2/26/2004 2/27/03
Soybean oil price$/lb.
0.353
0.2132
Oil yield, lbs./Bu.
11.06
11.2
Oil value,$/Bu.
3.904
2.388
Soybean meal price, $/ton
Meal yield, lbs./Bu.
Meal value,$/Bu.
275.00
45.86
6.306
184.00
43.78
4.028
Total value from products
Bean price, C. Illinois
Gross Crush Margin
10.210
9.42
0.790
6.416
5.88
0.536
Calculating Soybean Crush Margins
3/01/2007 3/02/06
Soybean oil price$/lb.
0.2889 0.2450
Oil yield, lbs./Bu.
11.26
11.59
Oil value,$/Bu.
3.25
2.84
Soybean meal price, $/ton
Meal yield, lbs./Bu.
Meal value,$/Bu.
209.60
44.09
4.62
176.10
44.08
3.88
Total value from products
Bean price, C. Illinois
Gross Crush Margin
7.87
7.30
0.58
6. 72
5.83
0.90
Key work areas for
Grain Merchandisers
* Arbitrage
= Maximizing return
over time & space
*Maximizing returns for available storage
*Utilizing transportation equipment
efficiently
* Choices heavily influenced by futures