Jessica Johnson, UNL Extension Educator - Ag Economics, explains the terminology involved in marketing agricultural crops via futures and options on futures

1. MARKETING 101:
LINGO!
PLEASE READ THE INSTRUCTIONS ON YOUR CARD,
DO NOT SHARE YOUR PRICE WITH ANYONE!
WE WILL BEGIN SOON!!!
Jessica Johnson – Asst. Extension Educator, Agricultural Economics
Updated: 2/24/2014

2. Market Lingo 101…
Created with WORDLE

3. Marketing 101: Lingo!
Futures &
Options on
Futures
Cash Markets

4. Marketing 101: Lingo!
Futures &
Options on
Futures
Cash Markets

5. Futures
Video http://bcove.me/o73u89sm
01:20 – 2:30
http://bcove.me/zonshves
Videos by CME Group

6. Futures Markets



An auction market in which participants buy and sell
standardized future contracts.
Hedgers are people who use the futures or options
as a substitute for buying and selling the actual
commodity
Speculators try to make money buying and selling
futures or options

7. http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contract_specifications.html

8. Market Commentary
http://www.youtube.com/watch?v=zsz9ghRdQb4

9. Futures Market
January 29, 2014

10. Futures Market
January 29, 2014
Corn, March 2014

11. Futures Market
January 29, 2014
Volume = # of contracts traded each day
Open Interest = # of contracts outstanding each day

12. Market Commentary
“Safrina” Crop, is the 2nd Brazilian corn crop. Production from the second corn crop is destined for the export market.
Video by Market Journal http://www.youtube.com/marketjournal

13. Ups and Downs
Bearish Market – Down Market
Bears attack by swiping paws down!
Bullish Market – Up Market
Bulls attack by thrusting horns up!

14. Market Commentary

15. Differences Between Contracts
Rural Radio Network Market Quotes
http://kneb.com/markets/market-quote.php?page=quote&sym=ZCl

16. Differences Between Contracts

Carrying Charge – Price difference between the
future delivery month and the near term month. It
represents how much the market is offering
producers to hold (carry) the grain until the distant
month.
Source: Dec. 23, 2010 Grain Transportation Report

17. Differences Between Contracts
Mar. – Dec = 0.108
Rural Radio Network Market Quotes
http://kneb.com/markets/market-quote.php?page=quote&sym=ZC

18. Differences Between Contracts
May – Dec. = 0.194
Rural Radio Network Market Quotes
http://kneb.com/markets/market-quote.php?page=quote&sym=ZC

19. Differences Between Contracts

Small or negative carrying charge → sell
 Negative
also called “Inverted”
 Lower demand in the future

Large carrying charge → store
 More
demand in the future
 The carrying charge must be larger than your
estimated storage costs for you to hold the product until
the later date!

20. Hedging


Hedging buying/selling futures contracts to protect
against loss due to changing cash markets.
Taking a position in a futures market opposite the position
held in the cash market

Short – plan to sell a commodity


protects the seller against falling prices
Long – plan to purchase a commodity, protects the buyer
against rising prices

21. Hedging

Hedging buying/selling futures contracts to protect
against loss due to changing cash markets.


Short – plan to sell a commodity, protects the seller against
falling prices
Long – plan to purchase a commodity, protects the buyer
against rising prices

22. Short
Hedging…Buy Low, Sell High
Sell Futures Contract
Long
Place
Buy Futures Contract
Buy Futures
Contract
Lift
Sell Futures
Contract
Sell
Commodity in
Cash Market
Cash Move
Buy
Commodity in
Cash Market

23. Example…Short December Corn
Place Hedge – SELL DEC ‘14 CORN
Lift Hedge – BUY DEC ‘14 CORN
$5.00 Futures Price
$4.00 Futures Price
Gain/Loss
$1.00 Futures Gain

24. Options on Futures
Video http://bcove.me/o73u89sm
2:30
Options give the buyer the right (or option) but not
the obligation to exercise the contract.

25. http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_contractSpecs_options.html

26. Put vs. Call Options

Put Option – gives the buyer the right to sell a futures
contract at a predetermined price (aka strike price) on or
before an expiration date.



Insurance against falling price
Minimum price for your commodity
Call Option- Give the buyer the right to buy a futures
contract a specific price (aka strike price) on or before an
expiration date.


Insurance against rising prices
Maximum price for your purchase

27. Price or Premium of the Option, not of the contract.
@CH14
C
4600
Contract
Call or Put
Strike Price
You can find similar information here http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html

28. Call Option
Put Option
In-the-money
Strike Price <Futures price
Strike Price >Futures price
At-the-money
Strike Price = Futures price
Strike Price = Futures price
Out-of-the-money
Strike Price >Futures price
Strike Price <Futures price

29. CALL
PUT
Put vs. Call Options
1. Offset: Sell PUT and get premium
Buy PUT and
pay premium
2. Exercise: SELL underlying futures contract
BUY Back
Futures
SELL in
cash
market
SELL Back
Futures
BUY in
cash
market
3. Expire: Do nothing and lose premium
1. Offset: Sell CALL and get premium
Buy CALL and
pay premium
2. Exercise: BUY underlying futures contract
3. Expire: Do nothing and lose premium

30. Example…Put November Soybeans
Situation
Expire
You expect prices to fall.
-$0.30 buy Premium
+$13.00 sell cash
$12.70 net gain
You buy a $12 strike price
November soybean put
option for a premium of
$0.30.
Prices rise.
The November cash price is
$13.

31. Example…Put November Soybeans
Situation
Offset
You expect prices to fall.
-$0.30 Buy Premium
+$1.30 Sell Premium
$1.00 option gain
+$12.00 cash sale
$13.00 net income
You buy a $12 strike price
November soybean put option
for a premium of $0.30.
Prices are steady but the $12
strike price November put option
premium increases to $1.30.
November cash price $12.00

32. Example…Put November Soybeans
Situation
Exercise
You expect prices to fall.
-$0.30 premium paid
+$12.00 Sell Futures
-$11.00 Buy futures
$0.70 gain from option
$10.50 cash sale
$11.20 net income
You buy a $12 strike price
November soybean put
option for a premium of
$0.30.
The November futures price
drops to $11. You exercise
your put option.
November cash price $10.50

33. Marketing 101: Lingo!
Futures &
Options on
Futures
Cash Markets

34. Cash Markets

Cash Sale- deliver your crop or livestock to the cash
market, grain elevator or meat packer, and receive
price for the day.
- CME Commodity Trading Manual

Immediate delivery and payment

35. Cash Market INFO

“Cash Grain Reports”
 Reported
daily on the
Rural Radio Network
 KRVN,
KNEB, KTIC
Western Nebraska Crop Prices
http://kneb.com/index.php?page_id=wzwu7qf6&de
scription=Local_Cash_Grain_Bids

36. Cash Market INFO

USDA AMS Reports
 Weekly
reports
 Commodities


NE, WH-GR110
W. NE, TO-GR110
 Hay


W. NE, TO-GR310
NE & IA, WH-GR310
Nebraska AMS Commodity Report
http://ams.usda.gov

37. Marketing 101: Lingo!
Futures &
Options on
Futures
Basis
Cash Markets

38. Video by Market Journal http://www.youtube.com/marketjournal

39. Futures Market
January 29, 2014
$4.11

40. Futures Market
January 29, 2014
$4.11
-0.16
Basis = Local Price – Nearby Futures Price

41. Local Price vs. Futures Price = BASIS

Basis – Transportation and handling costs to move
product from current location to point of delivery
 Storage
Costs
 Expected supply & demand
 Transportation services
 Variations in grade
 Substitutes
Source: Johnson, J., T. Holman and M. Stockton. Historical Crop Prices, Seasonal Patterns and Futures Basis for the Nebraska Panhandle. 1992-2012

42. Local Price vs. Futures Price = BASIS

“Under” – Cash price is less than futures price
 Basis
is Negative
 Local supply is abundant compared to perceived
demand

“Over” – Cash price is at a above to the futures
price
 Basis
is Positive
 Local supply limited compared to perceived demand

43. 2013/14 W. NE Corn Basis
Corn Basis
“Over”
2.00
1.50
1.00
0.50
“Under”
0.00
-0.50
-1.00
-1.50
SEP
OCT
NOV
DEC
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
2007/08-2012/13 Average Basis
Western Nebraska Basis Patterns
http://panhandle.unl.edu/c/document_library/get_file?uuid=5e6ae9bf-24d1-42a2-8e67-753e71ae81cf&groupId=131817&.pdf

44. Local Price vs. Futures Price = BASIS

“Strong”
 Higher
or less negative than
expected
 Market IS demanding grain

“Weak”
 Lower
or more negative than
expected
 Market is NOT demanding grain
Image Source: Google http://www.naomilkoffman.com/2012/03/25/the-opposite-party/
Naomi L. Koffman, Mixed Media Artist

45. 2013/14 W. NE Corn Basis
Corn Basis
2.00
1.50
1.00
0.50
0.00
-0.50
-1.00
-1.50
SEP
OCT
NOV
DEC
JAN
FEB
MAR
2007/08-2012/13 Average Basis
APR
MAY
JUN
JUL
AUG
2013/14
Western Nebraska Basis Patterns
http://panhandle.unl.edu/c/document_library/get_file?uuid=5e6ae9bf-24d1-42a2-8e67-753e71ae81cf&groupId=131817&.pdf

46. Basis Risk
Cash market and futures market do not move at the
same rate and or in the same direction.

47. Example…Short December Corn
Place Hedge – SELL DEC ‘14 CORN
Lift Hedge – BUY DEC ‘14 CORN
$5.00 Futures Price
$4.75 Cash Price
-0.25 Basis
$4.00 Futures Price
$3.75 Cash Price
-0.25 Basis
Net Sale Price
$1.00 Futures Gain
$3.75 Cash Price
$4.75 net price

48. Example…Short December Corn
Place Hedge – SELL DEC ‘14 CORN
Lift Hedge – BUY DEC ‘14 CORN
$5.00 Futures Price
$4.75 Cash Price
-$.25 Basis
$4.00 Futures Price
$3.50 Cash Price
-$.50 Basis
Net Sale Price
$3.50 Cash Price
$1.00 Futures Gain
$4.50 net Price

49. Example…Short December Corn
Place Hedge – SELL DEC ‘14 CORN
Lift Hedge – BUY DEC ‘14 CORN
$5.00 Futures Price
$4.75 Cash Price
-$.25 Basis
$4.00 Futures Price
$3.90 Cash Price
-$.10 Basis
Net Sale Price
$3.90 Cash Price
$1.00 Futures Gain
$4.90 net Price

50. Marketing 101: Lingo!
Futures &
Options on
Futures
Basis
Cash Markets

51. Questions/Comments?
Visit my website now!
Jessica Jo Johnson
Asst. Extension Educator
Office: 308-632-1247
jjohnson@unl.edu
PanhandleAgEcon
go.unl.edu/pagecon
Adopted from: CME commodity Trading Manual
Get current Panhandle price & basis information
TEXT “@UNLPREC” to 651-968-8358
Standard message & data rates apply.
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