Transcript Document 7360423

Grain Marketing in the BioFuels Era:
Session 3: Local Cash Market: February 5
Ethanol
Three Dimensions of Price
• 1. Flat price, cash price, or spot price
• 2. Futures
• 3. Basis
What is Basis?
Local Cash Price
- Nearby Futures Price
Nearby Local BASIS
Basis Terminology
When:
Cash > Futures,
we say the the basis is over.
Cash < Futures,
we say the basis is under.
Basis Example 1 (Under)
On June 20th :
Columbus Indiana wheat price = $3.50
Nearby July futures price
= $4.00
Basis
= - $.50
 “Columbus cash wheat is 50 cents
UNDER the July Futures”
Basis Example 2 (Over)
On January 25th :
Evansville Indiana Corn price = $3.15
Nearby March futures price
= $3.00
Basis
= +$.15
 “Evansville cash corn is 15 cents OVER
the March Futures”
Basis Movement
STRENGTHEN
More positive or
Less negative
+.30
+.20
+.10
0
-.10
-.20
-.30
WEAKEN
Less positive
or More
negative
Futures and basis pricing can occur
at separate times:
• Date
– March 20th
– March 30th
– April 5th
–
– Best Futures
– Best Basis
– Best Price
May Futures
$2.90
$2.70
$2.96
Basis
Cash
-.05
+.03
-.08
$2.85
$2.73
$2.88
Best Cash Price = $2.88
= $2.96
Worst Futures = $2.70
= +.03
Worst Basis = -.08
= $2.99
Worst Price = $2.62
What Affects the Level of the Basis?
• Storage costs between current time and
futures delivery period.
– Interest
– Bin costs
•
•
•
•
Distance to futures market (transportation)
Handling costs and elevator margin
Quality differences
Supply and demand in
– International market affects futures price) vs.
– Local markets (affects local price)
Meaning of Local Basis
The local basis is a good measure of the supply
and demand conditions in your local market. A
strong basis means that demand is strong relative
to available supply. A strong basis often means it’s
a good time to consider pricing some grain, either
cash pricing or at least consider pricing basis.
Seasonality of Crop Prices!
What’s Seasonality In?
-Futures
-Basis
-Cash Prices
What’s the Marketing Year?
Accounting period for a Marketing Year:
1. Corn is September 1- August 30
2. Soybeans is Sept.1 – August 30
3. Wheat is June 1 to May 31
Question: What is the 06/07 Marketing
Year for Corn and Soybeans??
Constructing Nearby Basis Charts
Soybean Example: Nearby Basis:
Central Indiana
$0.10
$0.05
--------------------Futures Month------------------Aug
$0.00
Price/bu.
-$0.05
-$0.10
-$0.15
-$0.20
-$0.25
-$0.30
-$0.35
Sept
1234123412345123412345123412341234123412345123412345
Nov
Jan
March
May
July
Sept Oct
Nov Dec Jan Feb Mar Apr May June July Aug
Average Futures & Cash Corn Central Indiana:
2001-05 Crops
$2.50
$2.40
$/bu.
$2.30
$2.20
$2.10
Futures
Cash
$2.00
$1.90
123412341234512341234512341234123412341234512341234
Sept Oct
Nov Dec
Jan
Feb Mar Apr May June July Aug
Average Futures & Cash Soybeans Central Indiana:
2001- 05 Crops
$6.80
$6.60
$6.40
$/bu.
$6.20
$6.00
$5.80
Futures
Cash
$5.60
$5.40
$5.20
1234123412345123412345123412341234123412345123412345
Sept Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
Basis Seasonality!
Central Indiana Corn Basis:Crops 01-05
0.00
-0.05
-0.10
-0.15
-0.20
'Average 00-05 Crops
-0.25
2006/07
-0.30
-0.35
1 23 4 12 34 12 3 45 12 34 1 23 45 12 3 41 23 41 23 4 12 34 12 3 45 12 34 1 23 4
Sept Oct
Nov
Dec
Jan
Feb Mar Apr May June July Aug
Central Indiana Corn Basis:Crops 00-06
0.10
0.00
-0.10
-0.20
-0.30
2000
'2004
-0.40
2001
'2005
2002
2006
2003
12341234123451234 12345123412341234 12341234512341234
Sept Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
0.10
Central Indiana Cash Bean Basis
0.05
0.00
-0.05
1 234 12 34 123 45 12 341 23 45 123 41 234 12 34 123 41 23 451 23 41 234 5
Sept Oct
Nov Dec
Jan
Feb Mar Apr May June July
Aug
-0.10
-0.15
-0.20
-0.25
-0.30
01-05Crops Average
-0.35
06/07
-0.40
-0.45
Central Indiana Soybean Basis: 2000-05
Crops
2001
2002
2003
'2004
2005
2006
0.20
Cents per bushel
0.10
0.00
-0.10
-0.20
-0.30
-0.40
-0.50
1 2 3 4 12 3 4 1 2 3 4 5 1 2 34 1 2 3 4 5 1 2 3 41 2 3 4 1 2 3 4 1 23 4 1 2 3 4 5 1 2 3 41 2 3 4 5
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
Corn: Evansville Area Basis: 2001-2005 Crops
0.15
0.10
0.05
Cents/bu.
0.00
-0.05
-0.10
-0.15
2001-05 Crops Avg
-0.20
2006 Crop
-0.25
-0.30
12 341 23 41 234 51 234 12 34 512 34 12 341 23 41 234 12 345 12 34 123 45
Sept Oct
Nov
Dec
Jan
Feb
Mar
Apr May
June
July
Aug
Bean Basis: Evansville Area: 2001-2005 Crops
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
-0.05
-0.10
-0.15
-0.20
-0.25
Average 2000-2004
2006
1234123412345123412345123412341234123412345123412345
Sept Oct
Nov
Dec
Jan
Feb Mar Apr May June July Aug
Ohio River Wheat Basis: 2001-2005 Crops
0.20
0.10
0.00
-0.10
-0.20
-0.30
-0.40
-0.50
'2001-2005 Crops
-0.60
'06/07
-0.70
-0.80
1 2 3 41 2 3 4 5 1 23 4 1 2 3 4 1 2 3 4 5 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 23 4 1 2 3 4 12 3 4 5
Jun
Jul
Aug
Sep
Oct
Nov Dec
Jan
Feb
Mar
Ap
May
Futures Seasonality!
Nearby Corn Futures 2001-2005 Crops
$2.50
$2.40
$2.30
$2.20
$2.10
1 2 34 1 2 3 41 2 3 4 51 2 3 4 12 3 4 5 12 3 4 1 23 4 1 2 34 1 2 3 41 2 3 4 51 2 3 4 12 3 4
Sept Oct
Nov
Dec
Jan
Feb Mar
Apr
May
June
July Aug
Nearby Soybean Futures Price: 2001-2005 Crops
$6.75
$6.50
$6.25
$6.00
$5.75
$5.50
123412341 23451234123451234 12341234123412345 123412345
Sept Oct
Nov
Dec
Jan
Feb Mar Apr May June
July
Aug
Cash Price Seasonality!
10 Year Avg. Central Indiana Corn:
Crops1996-05
2.35
2.30
2.25
2.20
2.15
2.10
2.05
10Years
2.00
Last 5 Years
1.95
12 341 234 123 451 2341 234 512 341 234 123 4123 412 345 123 412 34
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
Corn Cash Prices Evansville Area:
Crops 1996--2005
$2.50
$2.40
$2.30
$2.20
10 YearAvg
$2.10
Last 5 Years
$2.00
$1.90
1 234 12 341 234 12 345 12 345 123 41 234 12 341 234 51 234 12 341 234 5
Sept Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June July
Aug
10 Year Avg. Central Indiana Cash Soybeans:
Crops 96-05
$6.80
10 Years
last 5 Years
$6.60
$6.40
$6.20
$6.00
$5.80
$5.60
$5.40
1234 1234 1234 5123 4123 4512 3412 3412 3412 3412 3451 2341 2345
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
Average Evansville Area Cash Soybean Price:
Crops 1996-2005 Crops
$7.00
$6.75
$6.50
$6.25
$6.00
10YearAvg
$5.75
Last5Years
$5.50
$5.25
1 23 4 1 2 34 1 2 34 1 2 34 5 1 2 34 5 1 23 4 1 23 4 1 2 34 1 2 34 5 1 23 4 1 2 34 1 2 34 5
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
Cash Corn Price Short Crops: Adequate C/O
(88,91,93,02) Central Indiana
$2.65
$/Bu.
$2.55
$2.45
$2.35
$2.25
$2.15
Short crops tend to:
1. Peak earlier
2. Have less return to storage
3. Have more vulnerability to price
declines the next summer
123412341234512341234512341234123412341234512341234
Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug
Central Indiana Cash Corn Prices 1995/96
$5.50
$5.00
$/bu.
$4.50
3.79
$4.00
$3.50
2006/07
$3.00
2006/07
$2.50
$2.00
123 41 234 12 345 12 341 23 451 23 412 341 23 412 34 123 45 123 41 234
Sept
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
June
July
Aug
Cash Contract Alternatives
at Elevators
• Spot
• Cash Forward Contract
• Basis Contract
• Hedge-to-Arrive
• Min/Max Price Contracts
• Delayed Pricing Contract
Making decisions about which pricing
alternative to use is based upon:
(Current levels of futures and basis
(Anticipated direction of futures and basis
(Knowledge of pricing alternatives
(Risk bearing ability and
( Marketing goals
If anticipated direction is as follows,
use these simplified guidelines:
• Futures
– Up
– Up
– Down
– Down
Basis
What should be done???
Up
Do no pricing-wait for improvement
Down Sell Basis - Basis Contract
Up
Sell Futures-Hedge with
futures or options
Down Sell cash now!
Types of Cash Pricing Contracts in
Grain Industry?
• 1. Spot Sale
• 2. Cash Forward Contract- Negotiate the
bushels, delivery time, and price for
delivery in a forward time period!
• 3. Basis Contract- Elevator buys the basis
only, bushels are established, delivery date
can be negotiated. If delivery is for
immediate shipment, an advance payment
of 70% to 80% is often made.
Continued
• 4. Hedge-to-Arrive (HTA), or Futures OnlyElevator sells futures for the customer. No basis
is established. A final pricing date will be
determined. Producer often has the option to
Aroll@ the futures to a later period. Elevator pays
all margin calls. THESE contracts created
problems in 1996 when futures went very high,
and producers argued they were not aware of their
short futures positions.
Continued
• 5. Minimum/Maximum Price Contracts:
Elevator attaches one or more option
positions to a cash contract. Elevator
deducts the premium costs and a service fee
from the price the producer receives. If
futures prices change sufficiently, producer
can receive gains from options position, but
not less than the minimum, nor more than
maximum.
Producer forward cash contracts 3,000 bu. in spring, and
elevator manager also buys a call contract
May 15
Nov futures
$6.25
New crop basis
-.25
New crop cash
bid
Buy a $6.25 Call
$6.00
Contract charge
-.02
Minimum Price
$5.78
-.20 prem
Producer forward cash contracts 3,000 bu. in spring, and
elevator manager also buys a call contract
May 15
Nov futures
$6.25
New crop basis
-.25
New crop cash
bid
Buy a $6.25 Call
$6.00
Contract charge
-.02
Minimum Price
-.20 prem
$5.78
Producer has a cash forward
contract to deliver 3,000
bushels of beans in the fall
@$6.00. The elevator
manager also buys a $6.25 put
for their account, and deducts
the $.22 of costs. Producer has
a minimum futures price and
has priced the basis.
In the fall, if
Futures $8.00
Basis
-.10
Cash Price $7.90
$4.00
-.30
$3.70
Minimum $5.78
Gain Call $1.75
Final
$7.53
$5.78
$ 0.0
$5.78
Min/Max Alternatives
• To do at the elevator, the options must be
attached to a cash contract (CFTC rule).
• This is an example of a Minimum price
contract
• Can also do maximum price by selling a
call,or
• Min/Max by buying a put and selling a call
Continued
• 6. Delayed Pricing Contacts- Producer
delivers grain, but does not price it (not
futures or basis). Title to grain passes to
elevator. Producer has the right to price
the grain at the elevator=s board price up
to a negotiated time period. Farmer is a
general creditor of the elevator which may
create financial losses if the elevator fails.
What about New Crop Pricing?
The 07/08 Crops
• Prices lows tend to occur at harvest time
• There is often a favorable new-crop pricing window in the
March to Mid-May prior to planting.
• This tends to be about 20 to 25 cents per bushel for both
corn and soybeans
• Roughly 25% to 35% of the time prices go higher by
harvest.
– Poor spring and/or summer weather
– Major change in demand
• Consider pricing 25% to 35% of expected production in
the spring pricing window.
December Corn Futures: 1995-2004
$2.75
$2.70
$2.65
$2.60
$2.55
$2.50
$2.45
$2.40
$2.35
7/1 8/1 9/1 10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/112/1
November Soybean Futures: 1995-04: Average
605
600
595
590
585
580
575
570
565
560
555
10/1 11/1 12/1 1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1
Elevators Have Responded to this predominance of a
March to May spring price premium time window.
New Generation Pricing Contracts: In March to May
Forward Price Window
-Average Daily Price in March to May Window
-Average Price with a producer defined floor price
-Price with a producer defined weighting system in
the time window
-Price in a producer defined time window
-Price in a time window, but use a moving average or
RSI technical system to determine when to price
-Let an analyst make the decision of when to price
Futures Will Move
Up
Do no pricing,
wait for
Better improvement
Basis
Will
Get
-Basis contract.
-Sell cash and
Worse buy futures.
-Sell cash and
buy a call.
Down
-Hedge with futures
-Buy put options
-Hedge-to-Arrive at
elevator
Price now
Today is February 6: Say a farmer has corn in storage on-farm and
want to consider contract alternatives at the local elevator?
Storage Cost to June 1 per bushel
At-the-Money July Call Prem
$4.20
Today'sBidsForDelivery:
Elevator Bid: Delivery
Futures: March and July
Basis bid: Feb and June
Cash: Feb & June
2/5/2007
$4.00
-0.20
$3.80
Basis Contract is Today's Bid in relation to July Futures
6/1/2007
$4.20
-0.10
$4.10
-0.40
$0.11
$0.34
Contract Alternative
StoreCost
1. No Forward Pricing
-0.11
2. Spot Today
0.00
3. Cash Forward Contract
4. Basis Contract
5. Hedge-to-Arrive
-0.11
(BasisUnderJuly)
(July Futr)
-0.40
$4.20
6. Minimum Price
7. DelayedPricing (DP)
-0.02
-0.11
0.00
(DP Charge)
-0.06
-0.11
What if July futures and basis by June 1 are:
Futures
Up
Up
Down Down
Basis
Up
Down
Up
Down
Futures
Basis
Cash
$5.20
0.10
$5.30
$5.20
-0.40
$4.80
$3.20
0.10
$3.30
$3.20
-0.40
$2.80
Net Price Per Bushel
$5.19
$4.69
$3.19
$2.69
$3.80
$3.80
$3.80
$3.80
$3.99
$3.99
$3.99
$3.99
$4.78
$4.78
$2.78
$2.78
$4.19
$3.69
$4.19
$3.69
$4.46
$4.46
$3.46
$3.46
$5.13
$4.63
$3.13
$2.63
Now What?????
• Watch futures markets:
– What are current price levels
– Are prices generally going up/down/sideway
• Watch basis levels weekly
– Get historic basis records from your elevator manager
– Begin a weekly record of nearby futures and cash prices
• Which direction are futures and basis going
• What would be the best pricing alternatives if price
continue as they are now
• Talk with others about markets…….
• Get motivated to keep learning …….
Web Sites
Purdue Outlook:
http://www.agecon.purdue.edu/extension/prices/index.asp
Purdue/Illinois Weekly Letter:
http://www.farmdoc.uiuc.edu/marketing/newsletters.html
Futures Price Quotes: www.gptc.com
Futures Charts: http://www.futuresource.com/
Futures Commentary:
http://cbot.com/cbot/pub/page/0,3181,963,00.html
Cash Prices and basis: http://www.incorn.org/ go to “Local Cash
Grain Bids”
Will the future be “specific
attribute-identity preserved
marketing?”
Industry Implications
• Greater crop production specialization
– Specific-attribute genetics
• Oil yields
• Starch yields
• Nutritional value-animals
– Movement to monocultures for specific end users?
– Compressed planting and harvest windows
•
•
•
•
Machinery capacity at planting and harvest
GPS/Monitoring systems/Auto steer
Human capacity at planting and harvest
Grain handling capacity
Industry Implications
• Greater link between seed industry and final
market
• Contracts may become the norm
• What do contracts offer ethanol plants?
– Supply assurance
– Coordinate delivery/logistics
Assignments
1. Exercise comparing cash market strategies
Readings for Feb 12th: Market
Strategies
• Under Pricing Strategies tab:
– “Market Efficiency and Marketing to Enhance
Income of Crop Producers”
– “Do You Need a Market Advisory Service?”
– “Pre-harvest new-crop corn and soybean
pricing strategies show incentives for using
options markets”
Questions
• To email in questions, either give them to
your host or send them to Corinne
Alexander:
• [email protected]