2008 K-State Risk Assessed Marketing Workshops Grain Marketing Principles & Tools Cash Grain...

2008 K-State Risk Assessed Marketing

Workshops

Grain Marketing Principles & Tools

Cash Grain Basis, Forward Contracts, Futures & Options

Dr. Daniel M. O’Brien

Extension Agricultural Economist

K-State Research and Extension

Price Trend EffectsOn Cash Sales & Forward Contracts

Pricing Alternatives

Falling Futures

Rising Futures

Wider Basis

Narrower Basis

Cash Market Sales ( ) () ( ) ()

Forward Cash Contract None None None None

Basis Contract ( ) () None None

Hedge-to-Arrive (HTA) None None ( ) ()

Minimum Price Contract None () None None

Price Later Contract ( ) () ( ) ()

Price Trend EffectsOn Futures, Options & Marketing Loans

Pricing Alternatives

Falling Futures

Rising Futures

Wider Basis

Narrower Basis

Short Futures Hedge None None ( ) ()

Buy Put Options None () ( ) ()

Sell Cash & Buy Calls None () None None

Marketing Loans None () ( ) ()

Risk Exposure of Marketing ToolsA. Options Volatility Risk

Risk that option premiums will not change 1-for-1 with cash/futures as the price level changes

B. Production Risk if Pre-harvest Pricing Risk of being unable to deliver grain to fulfill a contract

C. Counter Party Risk Risk that a buyer wont fulfill their contract obligations

D. Control Risk Risk of market actions getting “out of control” before

corrective actions can be taken by the seller

?

Areas of Risk ExposureFor Cash Sales & Forward Contracts

Pricing Alternatives

Options Volatility

Prodn. Risk if

Prehvst.

Counter Party Risk

Control

Risk Cash Market Sales --- --- --- Yes

Forward Cash Contract --- Yes Yes ---

Basis Contract --- Yes Yes Yes

Hedge-to-Arrive (HTA) --- Yes Yes Yes

Minimum Price Contract Yes Yes Yes Yes

Price Later Contract --- --- Yes Yes

Areas of Risk ExposureFor Futures, Options & Marketing Loans

Pricing Alternatives

Options Volatility

Prodn. Risk if

Prehvst.

Counter Party Risk

Control

Risk Short Futures Hedge --- Yes --- Yes

Buy Put Options Yes Yes --- Yes

Sell Cash & Buy Calls Yes --- --- Yes

Marketing Loans --- --- --- Yes

Hedging With Futures

Price Hedges on Grain Production

1) (Prehedge) Analyze hedging opportunity Futures less Basis less Brokers’ fees

2) (Placing the Hedge) Sell futures contract(s) nearest to the grain delivery period In a “Short” or “sell” futures position

3) (Closing Out the Hedge Position)

Buy back futures contract(s)

Sell cash grain (optional)

Grain Forward Pricing Decisions How Much to Forward Contract or Hedge?

For Pre-Harvest Pricing: Max of 50%-75% of expected production (average yields)

If have a short crop, use Crop Insurance Coverage revenues to help fill Forward Contract obligations

Recommended: A disciplined grain marketing plan

What Time Period to Set Grain Delivery In? Examine Harvest vs Post Harvest Basis, Storage

Returns, and Grain Delivery Opportunities Timing of cash flow needs

Forward Contract Vs Futures Hedge If Basis Projection is Accurate, then..

Forward Contract $ = Futures Hedge $

Who Carries the Futures Account? FC: Elevator contacts broker & pays any margin calls Hedge: Producer works w. broker, pays margin calls

Delivery Commitment? FC: Delivery commitment of X bushels for $X price Hedge: No delivery commitment to elevator

Basis Commitment? FC: Set cash basis / Hedge: Varying cash basis

New Crop July 2009 HRW Wheat Examples for Friday, March 6, 2009 KCBT July 2009 HRW Wheat Prices

Seasonal Average Cash Price Trends

Basis History (2005-2009)

Futures Hedge & Forward Contract for Harvest Delivery

Put & Call Option Premiums (3/6/09)

Hard Red Winter Wheat FuturesKCBT: 2000 through 2009

$7.50/bu

$5.00/bu

$7.50

$5.00

$2.50

KCBT JULY 2009 HRW WheatMarch 6, 2008 – March 6, 2009

$7.00

$5.00

$6.00

Cash Wheat Basis: McPherson, KSYears 2005-2009

2009 New Crop Bids (3/6/09): $0.63 /bu under JULY KC Wheat

2009 Preharvest Wheat HedgeHedging on Tuesday, March 6, 2009 Target Sales Date: July 1, 2009

Wheat Futures Price (3/6/09) July ‘09 KCBT Wheat = $5.81 1/4

Expected Corn Basis (McPherson, KS) $0.63 under JULY KCBT Wheat on July 1st

2009 Wheat Hedge Expected Price = $5.18 /bu

JULY KCBT Wheat – Basis – Broker’s Fees $5.81 - $0.63 - $0.01 = $5.18

New Crop Wheat Hedge ExampleScenario A: Falling Wheat Prices into 2009 HarvestDate Cash Transactions

Futures Basis Expt. $: $5.18 ($5.81 - 0.63*) By July 1, 2009

On 3/6/09 No Cash Transactions

On 3/6/09 Expt Sell JULY 09 @$5.81 ($0.63)

On 7/1/09 Sell Cash Wheat @ $3.68

On 7/1/09 Actual Buy JULY 09 @$4.31 ($0.63)

Net Gain/Loss on Futures: Gain of $1.50 /bu ($0.01 broker fee)

Final Net Price = $5.18 /bu Cash $3.68 + $1.50 Futures Gain

New Crop Wheat Hedge ExampleScenario B: Rising Wheat Prices into 2009 HarvestDate Cash Transactions

Futures Basis Expt. $: $5.18 ($5.81 - 0.63*) By July 1, 2009

On 3/6/09 No Cash Transactions

On 3/6/09 Expt Sell JULY 09 @$5.81 ($0.63)

On 7/1/09 Sell Cash Wheat @ $6.68

On 7/1/09 Actual Buy JULY 09 @$7.31 ($0.63)

Net Gain/Loss on Futures: Loss of $1.50 /bu ($0.01 broker fee)

Final Net Price = $5.18 /bu Cash $6.68 – $1.50 Futures Loss

2009 NC Wheat Forward Contract McPherson, Kansas

Mid Kansas Coop, McPherson, KansasMarch 10, 2008 – March 6, 2009Source: DTN Bid Analyzer

$5.18 /bu on 3/6/09FC Basis: $0.63 /bu underKC July 2009 Wheat Futures

JULY ‘09 HRW Wheat Put-Call Option $s

0.750.81

0.88

0.770.71

0.660.61

0.680.62

0.560.500.45

0.400.36

0.43

0.57

0.400.460.490.53

$0.00

$0.30

$0.60

$0.90

$1.20

$5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30

Strike Prices

Pre

miu

m $

/ bu

Put Option Premiums Call Option Premiums

JULY 2009 KCBT Wheat Close:

$5.81 1/4 /bu on March 6, 2009

2009 JULY Wheat Put Option Values

$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

$1.80

$5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30

Strike Prices

Pre

miu

m $

/bu

Put Time Value Put Intrinsic Value

JULY 2009 Wheat Futures Close:

$5.81 1/4 /bu on March 6, 2009

"In the Money" Puts:SP > Futures

"Out of the Money" Puts:SP < Futures

2009 JULY KC Wheat Put Price Floors

$4.3

9

$4.4

5

$4.5

0

$4.5

5

$4.5

9

$4.6

3

$4.6

7

$4.7

0

$4.7

4

$4.7

7

0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.63 0.630.36 0.40 0.45 0.50 0.56 0.62 0.68 0.75 0.81 0.88

$0.00

$2.00

$4.00

$6.00

$8.00

$5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30

Strike Prices

Pre

miu

m $

/bu

Floor Price* Basis Put Premium Broker Fee

At the Money: $5.81 1/4 /bu (3/6/09)

Results of Buying a $5.80 July Wheat Put Option @ $0.55 1/2 /bu

$3.18$3.68

$4.18

$7.18

$4.60 $4.60 $4.60 $4.60 $4.60 $5.10 $5.60 $6.10 $6.60

$4.68

$5.18$5.68

$6.18$6.68

($1.00)

$1.00

$3.00

$5.00

$7.00

$9.00

$3.81 $4.31 $4.81 $5.31 $5.81 $6.31 $6.81 $7.31 $7.81

Futures Prices

Net

Ret

urn

$/bu

Cash Price Net Put Return Net Price Received

July 2009 Wheat Call Option Values

$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

$5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30

Strike Prices

Pre

miu

m $

/bu

Call Time Value Call Intrinsic Value

July 2009 Wheat Futures Close:

$5.81 1/4 /bu on March 6, 2009In the Money Calls:

SP < Futures

Out of the Money Calls:SP > Futures

JULY ‘09 KC Wheat Call Price CoverageMinimum Price Increase Needed to Cover Call Premium Cost

$5.5

0

$5.6

0

$5.7

0

$5.8

0

$5.9

0

$6.0

0

$6.1

0

$6.2

0

$6.3

0

0.77 0.71 0.66 0.61 0.57 0.53 0.49 0.46 0.43 0.40

$5.4

0

$0.00

$3.00

$6.00

$9.00

$5.40 $5.50 $5.60 $5.70 $5.80 $5.90 $6.00 $6.10 $6.20 $6.30

Strike Prices

Pre

miu

m $

/bu

Strike Price Call Option Premiums Broker Fee

At the Money: $5.81 1/4 /bu (3/6/09)

Results of Buying a $5.80 JULY 2009 Wheat Call Option @ $0.56 3/4 /bu

$0.00$0.50

$1.00$1.50

$2.00

($0.59) ($0.59) ($0.59) ($0.59) ($0.59)($0.09)

$0.41$0.91

$1.41

$0.00

($1.50)

$0.00

$1.50

$3.00

$4.50

$3.81 $4.31 $4.81 $5.31 $5.81 $6.31 $6.81 $7.31 $7.81

Futures Prices

Net

Ret

urn

$/bu

Call Purchase Price Call Selling Price Broker Fee Net Call Returns

July 2009 Wheat Futures Close:

$5.81 1/4 /bu on 3/6/09

New Crop DEC 2009 Corn Examples for March 6, 2009

CBOT DEC 2009 Corn Futures Prices

Seasonal Average Cash Price Trends

Basis History (2005-2009)

Futures Hedge & Forward Contract for Harvest Delivery

Put & Call Option Premiums (3/6/09)

Corn FuturesCBOT: 2000 through 2009

$7.50/bu

$5.00/bu

$5.00

$3.75

$2.50

CBOT DEC 2009 CornMarch 6, 2008 – March 6, 2009

$4.50

$4.00

$3.50

Cash Corn Basis: McPherson, KSYears 2005-2009

2009 New Crop Bids (3/6/08): $0.51 /bu under DEC Corn

Cash Milo Basis: McPherson, KSYears 2005-2009

2009 New Crop Bids (3/6/09): $1.14 /bu under DEC Corn

2008 Preharvest Corn HedgeHedging on Tuesday, March 6, 2009 Target Sales Date: November 15, 2008

Corn Futures Price (3/6/09) December ‘09 CBOT Corn = $3.90 3/4

Expected Corn Basis (McPherson, KS) $0.51 under DEC CBOT Corn on November 15th

2009 Corn Hedge Expected Price = $3.39 /bu

DEC 09 CBOT Corn – Basis – Broker’s Fee $3.91 - $0.51 - $0.01 = $3.39

New Crop Corn Hedge ExampleScenario A: Falling Corn Prices into 2009 HarvestDate Cash Transactions

Futures Basis Expt. $: $3.39 ($3.91 - 0.52*) By November 15, 2009

On 3/6/09 No Cash Transactions

On 3/6/09 Expt Sell DEC 09 @$3.91 ($0.52)

On 11/15/09 Sell Cash Corn @ $1.89

On 11/15/09 Actual Buy DEC 08 @$2.41 ($0.52)

Net Gain/Loss on Futures: Gain of $1.50 /bu

Final Net Price = $3.39 /bu Cash $1.89 + $1.50 Futures Gain

New Crop Corn Hedge ExampleScenario B: Rising Corn Prices into 2009 HarvestDate Cash Transactions

Futures Basis Expt. $: $3.39 ($3.91 - 0.52*) By November 15, 2008

On 3/6/09 No Cash Transactions

On 3/6/09 Expt Sell DEC 09 @$3.91 ($0.52)

On 11/15/09 Sell Cash Corn @ $4.89

On 11/15/09 Actual Buy DEC 09 @$5.41 ($0.52)

Net Gain/Loss on Futures: Loss of $1.50 /bu

Final Net Price = $3.30 /bu Cash $4.89 – $1.50 Futures Loss

2009 New Crop Corn Forward Contract McPherson, Kansas

Mid Kansas Coop, McPherson, KansasMarch 10, 2008 – March 6, 2009Source: DTN Bid Analyzer

$3.40 /bu on 3/6/09FC Basis: $0.51 /bu underCBOT DEC 2009 Corn Futures

DEC 2009 Corn Put-Call Option Prices

$0.63$0.69

$0.76$0.83

$0.90$0.83

$0.77$0.72

$0.67

$0.44$0.57

$0.51$0.46$0.41$0.37$0.33$0.41

$0.47$0.50$0.53$0.62 $0.57

$0.00

$0.50

$1.00

$1.50

$3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40

Strike Price

Pre

miu

m $

/bu

Put Option Premiums Call Option Premiums

DEC 2009 Corn Futures Close:

$3.90 3/4 /bu on March 6, 2009

DEC 2009 Corn Put Option Values

$0.00

$0.30

$0.60

$0.90

$1.20

$1.50

$3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40

Strike Prices

Pre

miu

m $

/bu

Put Time Value Put Intrinsic Value

DEC 2009 Corn Futures Close:

$3.90 3/4 /bu on March 6, 2009 "In the Money" Puts:SP > Futures

"Out of the Money" Puts:SP < Futures

DEC 2009 Corn Put Price Floors

$2.5

4

$2.6

0

$2.6

6

$2.7

1

$2.7

6

$2.8

0

$2.8

4

$2.8

8

$2.9

1

$2.9

4

$2.9

7

0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.51 0.510.33 0.37 0.41 0.46 0.51 0.57 0.63 0.69 0.76 0.83 0.90

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40

Strike Prices

Pre

miu

m $

/bu

Floor Price* Basis Put Premium Broker Fee

At the Money: $3.90 3/4 /bu (3/6/09)

Results of Buying a $3.90 DEC 2009 Corn Put Option @ $0.56 5/8 /bu

$1.39$1.89

$2.39

$5.39

$2.80 $2.80 $2.80 $2.80 $2.80$3.30

$3.80$4.30

$4.80$4.89$4.39

$3.89$3.39

$2.89

($1.00)

$1.00

$3.00

$5.00

$7.00

$1.90 $2.40 $2.90 $3.40 $3.90 $4.40 $4.90 $5.40 $5.90

Futures Prices

Net

Ret

urn

$/bu

Cash Price Net Put Return Net Price Received

DEC 2009 Corn Call Option Values

$0.00

$0.45

$0.90

$1.35

$1.80

$3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40

Strike Prices

Pre

miu

m $

/bu

Call Time Value Call Intrinsic Value

DEC 2009 Corn Futures Close:

$3.90 3/4 /bu on March 6, 2009

In the Money Calls:SP <Futures

Out of the Money Calls:SP > Futures

DEC 2009 Corn Call Price CoverageMinimum Price Increase Needed to Cover Call Premium Cost

$3.5

0

$3.6

0

$3.7

0

$3.8

0

$3.9

0

$4.0

0

$4.1

0

$4.2

0

$4.3

0

$4.4

0

0.620.47

$3.4

0

0.410.440.500.530.570.670.720.770.83

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$3.40 $3.50 $3.60 $3.70 $3.80 $3.90 $4.00 $4.10 $4.20 $4.30 $4.40

Strike Prices

Pre

miu

m $

/bu

Strike Price Call Option Premiums Broker Fee

At the Money: $3.90 3/4 /bu (3/6/09)

Results of Buying a $3.90 DEC 2009 Corn Call Option @ $0.57 3/8 /bu

$0.00$0.50

$1.00$1.50

$2.00

($0.60) ($0.60) ($0.60) ($0.60) ($0.60)($0.10)

$0.40$0.90

$1.40

($1.50)

$0.00

$1.50

$3.00

$4.50

$1.90 $2.40 $2.90 $3.40 $3.90 $4.40 $4.90 $5.40 $5.90

Futures Prices

Net

Ret

urn

$/bu

Call Purchase Price Call Selling Price Broker Fee Net Call Returns

DEC 2009 Corn Futures Close:

$3.90 3/4 /bu on 3/6/09

New Crop NOV 2009 Soybeans Examples for March 6, 2009 CBOT NOV 2009 Soybean Futures Prices

Seasonal Average Cash Price Trends

Basis History (2005-2009)

Futures Hedge & Forward Contract for Harvest Delivery

Put & Call Option Premiums (3/6/09)

Soybean FuturesCBOT: 2000 through 2009

$7.50/bu$10.00

$7.50

$5.00

CBOT NOV 2009 SoybeansMarch 6, 2008 – March 6, 2009

$10.50

$9.00

$7.50

Cash Soybean Basis: McPherson, KSYears 2005-2009

2009 New Crop Bids (3/6/09): $1.05 /bu under NOV Soybeans

2009 NC Soybean Forward Contract McPherson, Kansas

$7.10 /bu on 3/6/09FC Basis: $1.05 /bu underCBOT NOV 2009 Soybean Futures

Mid Kansas Coop, McPherson, KansasMarch 10, 2008 – March 6, 2009Source: DTN Bid Analyzer

NOV ‘09 Soybean Put-Call Option $s

$1.05$1.16

$1.29$1.42

$1.55$1.69$1.63

$1.40

$0.65

$0.94$0.83$0.74

$0.65$0.57$0.71$0.77$0.84$0.92$1.00

$1.08

$0.00

$0.60

$1.20

$1.80

$2.40

$7.00 $7.20 $7.40 $7.60 $7.80 $8.00 $8.20 $8.40 $8.60 $8.80 $9.00 $9.20

Strike Prices

Pre

miu

m $

/bu

Put Option Premiums Call Option Premiums

NOV 2009 CBOT Soybean Close:$8.15 /bu on March 6, 2009

NOV 2009 Soybean Put Price Floors

$7.2

0

$7.4

0

$7.6

0

$7.8

0

$8.0

0

$8.2

0

$8.4

0

$8.6

0

$8.8

0

$9.0

0

$9.2

0

1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05 1.05

0.57 0.65 0.74 0.83 0.94 1.05 1.16 1.29 1.42 1.55 1.69

$0.00

$3.00

$6.00

$9.00

$12.00

$15.00

$7.20 $7.40 $7.60 $7.80 $8.00 $8.20 $8.40 $8.60 $8.80 $9.00 $9.20

Strike Prices

Pre

miu

m $

/bu

Strike Price Basis Put Premium Broker Fee

At the Money: $8.15 /bu (3/6/09)

NOV 2009 Soybean Call Price CoverageMinimum Price Increase Needed to Cover Call Premium Cost

$7.4

0

$8.0

0

$8.2

0

$8.4

0

$8.6

0

$8.8

0

$9.0

0

$9.2

0

0.92 0.84 0.77 0.71 0.65

$7.0

0

1.001.081.63 1.40

$0.00

$3.00

$6.00

$9.00

$12.00

$15.00

$7.00 $7.20 $7.40 $7.60 $7.80 $8.00 $8.20 $8.40 $8.60 $8.80 $9.00 $9.20

Strike Prices

Pre

miu

m $

/bu

Strike Price Call Option Premiums Broker Fee

At the Money: $8.15 /bu (3/6/09)

Questions or Comments?

K-State Agricultural Economics Department Website:

www.Agmanager.Info