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Copyright 2009 Commodity & Ingredient Hedging, LLC3 Negotiation Examples 1.) Seller has a spot load of hogs to sell next Thursday. Buyer and seller agree to $78. No reference made to futures or USDA report Which category should it be reported in?
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Commodity & Ingredient Hedging, LLCwww.cihedging.com
312-596-7755
Commodity & Ingredient Hedging, LLCwww.cihedging.com
312-596-7755
2015 PORK Management Conference
Price Discovery &Mandatory Price Reporting
Copyright 2009 Commodity & Ingredient Hedging, LLC 2
Hog Sales Negotiation Examples
Copyright 2009 Commodity & Ingredient Hedging, LLC 3
Negotiation Examples
1.) Seller has a spot load of hogs to sell next Thursday.
Buyer and seller agree to $78.
No reference made to futures or USDA report
Which category should it be reported in?
Copyright 2009 Commodity & Ingredient Hedging, LLC 4
Negotiation Examples
2.)Seller has a spot load of hogs to sell next Thursday and notices that high end of WCB yesterday was $78
Seller asks for yesterdays WCB high.
Buyer and seller agree to that, which is a known $78 at the time
Which category should it be reported in?
Copyright 2009 Commodity & Ingredient Hedging, LLC 5
Negotiation Examples
3.) Seller has a spot load of hogs to sell next Thursday and asks for $78.
Buyer asks how seller got to that figure and seller mentions it was the high end of yesterdays WCB. Buyer justifies the price since it was printed in a USDA report.
Buyer and seller agree on $78
Which category should it be reported in?
Copyright 2009 Commodity & Ingredient Hedging, LLC 6
Negotiation Examples
4.) Buyer and seller agree to price a load of hogs for delivery next Thursday at that days PM WCB high.
Price is not known
Which category should it be reported in?
Copyright 2009 Commodity & Ingredient Hedging, LLC 7
Negotiation Examples
5.) Seller notices that July hog futures settled at $78 and mentions to buyer that he would like to get the July futures close. Buyer justifies the price since it was a printed futures value.
Buyer and seller agree to $78
Which category should it be reported in?
Copyright 2009 Commodity & Ingredient Hedging, LLC 8
Copyright 2009 Commodity & Ingredient Hedging, LLC 9
2013 (3.42%)2014 (3.20%)
Copyright 2009 Commodity & Ingredient Hedging, LLC 10
HR 2051- Mandatory Price Reporting Act of 2015
NEGOTIATED FORMULA PURCHASE
The term ‘negotiated formula purchase’ means a purchase of swine by a packer from a producer under which—
(A) the pricing mechanism is a formula price for which the formula is determined by negotiation on a lot-by-lot basis; and
(B) the swine are scheduled for delivery to the packer not later than 14 days after the date on which the formula is negotiated and swine are committed to the packer.’’
Copyright 2009 Commodity & Ingredient Hedging, LLC 11
CME Lean Hog Index Calculation
Copyright 2009 Commodity & Ingredient Hedging, LLC 12
CME Lean Hog Index Calculation
CME Lean Hog Index is a two-day weighted average of average net prices for slaughtered barrows and gilts as reported by USDA in its National Daily Direct Hog Prior Day Report-Slaughtered Swine (USDA Report LM_HG201).
The index calculation takes into account both negotiated hogs as well as swine or pork market formula hogs, and is calculated as follows:
CME Lean Hog Index = 2-Day Combined Total Value 2-Day Combined Total Weight
Copyright 2009 Commodity & Ingredient Hedging, LLC 13
CME Lean Hog Index Calculation
Copyright 2009 Commodity & Ingredient Hedging, LLC 14
CME Lean Hog Index Calculation
Correlation = 97%
Copyright 2009 Commodity & Ingredient Hedging, LLC 15
CME Lean Hog Index Calculation
Correlation = 99%
Copyright 2009 Commodity & Ingredient Hedging, LLC 16
CME Lean Hog Index Calculation
If the Negotiated Formula Purchase category is passed, the CME would likely need to include this column in the calculation since they would be coming out of the Swine or Pork Market Formula column.
Copyright 2009 Commodity & Ingredient Hedging, LLC 17
Summary
•Percentage of negotiated hogs continues to decline
•Direct effect on contract hogs as well as CME futures
•When negotiating, referencing to a USDA value may push
it to the swine or pork market column
•Adding the Negotiated Formula column will help
•Producers that feel they are negotiating pigs need to
ensure they are being reported as negotiated
•Verify with Market News
End