The information contained in this presentation is taken from sources which we believe to be reliable, but is not guaranteed by us as to accuracy or completeness and is presented to you for information purposes only.
There is a risk of loss when trading commodity futures and options. Country Hedging, Inc. bases its recommendations solely on the judgment of Country Hedging, Inc. personnel.
Price RiskDeveloping a
Marketing Planand Marketing Tools Basics
Country Hedging, Inc., Cenex Harvest States5500 Cenex Drive
Inver Grove Heights, MN 55077-1733
1-800-243-3432 or www.countryhedging.com
Table of Contents
Marketing Decisions…………………………..1
How Much and When to Sell…………………2
Selling Seasons………………………………..3
1996 Farm Bill…………………………….……4
Developing a Marketing Plan………………...5
Marketing……………………………………….6
Crop Price Seasonals………………………...16
Marketing Tool Basics………………………..18
Price Discovery………………………………..19
Hedging………………………………………...20
Futures…………………………………………21
Margin………………………………………….23
Hedging Review………………………………24
Basis…………………………………………...25
Picking the Proper Tool……………………...28
Options………………………………………...29
Country Hedging Producer Brokers
St. Paul, MN: 1-800-243-3432 Keith Banta, Tim Bolan, Brian Peiler,Tom Potter, Kyle Sieren, Doug Skarp
Aberdeen, SD: 1-800-388-8788 Marcia Eidahl, Brad Erickson
Fairmont, MN: 1-800-992-5528 Pat Murphy, Mark Weineke
Northfield, MN: 1-800-433-4385 Jim Wendland
Kansas City, MO: 1-800-961-1133 Jeff Peterson, Eric Sperber
Sell Cash/Buy Call
Sell Cash/Buy Futures
Cash Sale
Need Money
Like Price
Sell Cash (in bin)
Delayed Price
Basis Fixed
Waiting for
Better Price
Store Grain
Sell Futures
Buy Put Option
Hedge to Arrive
Scale Up Strategy
Like Price
Sell Production
Marketing Decisions
Harvest
1999 Crop How much to sell?
When to sell?
Pre-Harvest Storage
Market Plan
Selling Seasons: Pre-Plant
Growing
Harvest
Storage
New Old
Pre-Plant Storage
Growing
Harvest
1996 FARM BILL
Risk Management is Imperative
The 1996 farm bill eliminated deficiency payments which, since 1973, provided producers ofprogram crops price supports during years of low prices. Producers will now receive“CONTRACT PAYMENTS” that are fixed.
The 1996 farm bill provides FIXED payments in two installments.
50% advance payment made on the 15th of December or January, at the option
of the producer.
Final payment made no later than September 30th of each fiscal year 1997 -
2002.
Contract Payment estimates (Payments are adjusted up or down depending onparticipation):
YEAR CORN WHEAT MILO 1997 46 cents 61 cents 50 cents1998 36 cents 65 cents 42 cents1999 36 cents 63 cents 43 cents2000 32 cents 57 cents 37 cents2001 26 cents 46 cents 30 cents2002 25 cents 45 cents 29 cents
Payments are made on 85% of your base acres with your payment yield level remainingconstant.
Set aside authority has been eliminated - full flexibility in planting.
Farm payments are fixed and decline at the end of 7 years.
The Target price levels from the 1990 farm bill no longer applies. Those levels were:
Corn $2.75Milo $2.61Wheat $4.00
Two Major types of risk associated with growing crops:
Price Risk Production Risk
Managing Price (Marketing) RiskKnow the level of risk you are comfortable with.Be willing to increase the number of skills in your marketing toolbox.Develop a Marketing Plan.
Managing Production RiskEnterprise Diversification.Crop Insurance.Contract Production
DEVELOPING A MARKETING PLAN
A marketing plan should be an integral part of your farming operation’s total business plan. Thetwo major components of a marketing plan, and the amount of emphasis each component shouldreceive when developing your marketing plan are…
Outlook 10% Strategy 90%
Let’s take a look at what determines price outlook.
Weather- Before planting (when/if crop gets planted)- Growing (Hot, dry, too wet, freeze)
Acres- How many will be planted? (price/weather)
Demand- A major factor after the crop is harvested.
Weather is the most volatile component of outlook. Weather can easily drive prices sharply higher orlower. This component is highly UNPREDICTABLE.
Acres planted to a crop can be affected by price, rotation practices and weather. USDA will release it’sfirst forecast of planting intentions in January for Winter Wheat and on March 31
st for Spring Wheat, Corn
and Soybeans. On June 30th, USDA will release the planted acreage report. Grain futures prices canmove sharply higher or lower depending on the outcome of these acreage reports.
Demand can have a major influence on grain future prices when the crop is harvested and in the bin.
How accurately can anyone predict the WEATHER or the number of ACRES that may be planted to acrop or what the DEMAND will be for that crop? Let’s face it, it is very DIFFICULT to predict weather,planted acres or demand.
Based on the facts just presented, outlook is extremely variable. And because of that, 90% of yourmarket planning should concentrate on STRATEGY.
Let’s look at developing a marketing plan based on the assumption that we will have a normal growingseason; but let’s also have a backup plan just in case a short crop develops.
MARKET PLAN DEVELOPMENT
What do you need to know to put a plan together?
Grain available to market Available On-farm Storage When you need money Tax ramifications (if any) Realistic price objective Break-even price Stay in business price (covers all out-of-pocket cash expenses)
The next step is to MAP OUT A PLAN.
Your plan will be unique; it’s your personal strategy.
Define your selling season - Break down season by season (component).
Percent of Crop to Market Marketing Tools
Pre-plant ____________ ______________________________
Growing ____________ ______________________________
Harvest ____________ _______________
Storage ____________ ______________________________
Goals of your Marketing Plan
ProfitabilityControl Risk
Mapping out your plan: Set price and time objectives for each component of your defined selling season. Have a default date and quantity if your Price Target was not achieved.
NEW CROP - MARKET PLAN DEVELOPMENT
CROP:_______________
I am willing to either Forward Contract or HEDGE ___________%I am willing to use a Minimum Price Contract on ___________% of my realisticprojected production before HARVEST.
Pre-Plant:
Hedge or FC _______% of my realistic projected production By___________
Min Price _______% of my realistic projected production By___________
_______% TOTAL
Growing:
Hedge or FC _______% of my realistic projected production By___________
Min Price _______% of my realistic projected production By___________
_______% TOTAL
CROP:_______________
I am willing to either Forward Contract or HEDGE ___________%I am willing to use a Minimum Price Contract on ___________% of my realisticprojected production before HARVEST.
Pre-Plant:Hedge or FC _______% of my realistic projected production By___________
Min Price _______% of my realistic projected production By___________
_______% TOTALGrowing:Hedge or FC _______% of my realistic projected production By___________
Min Price _______% of my realistic projected production By___________
_______% TOTAL
PRICE OUTLOOK DATE:_____________
Crops Grown ____________ ____________ ____________ ____________
Cash Price ____________ ____________ ____________ ____________
New Crop Price ____________ ____________ ____________ ____________
Cost of Production ____________ ____________ ____________ ____________
CONTRACT HIGHS for CROPS GROWN
Old Crop - Grain ____________ ____________ ____________ ____________
New Crop - Grain ____________ ____________ ____________ ____________
PRICE PROJECTIONS for NEW CROP: Short Crop vs Normal to Large Crop
Short Crop - Price ____________ ____________ ____________ ____________
Normal to Large Crop ____________ ____________ ____________ ____________
Your Price Outlook for crops that are raised on your farm
Old Crop ____________ ____________ ____________ ___________
New Crop ____________ ____________ ____________ ____________
NEW CROP SELLING SEASON - CROP YEAR_____CROP______________
% of Crop to Sell Before Harvest __________________ Futures or Forward Contract
% of Crop that I will cover with option strategies __________________ Buy Puts__________________ Sell Cash - Buy Calls
TODAY’S FUTURESContract High __________ Month Price Contract Low __________ _______ _______Difference __________ _______ _______1/3 Retracement __________ _______ _______1/2 Retracement __________2/3 Retracement __________
MONTH
MAX % TOCONTRACTMIN % TOCONTRACTPERCENT OFGRAIN TOCONTRACT AT:
PERCENT TOPROTECT WITHLONG PUTS
STRIKEPREMIUM
PERCENT TOPROTECT WITHLONG CALLS
STRIKEPREMIUM
OLD CROP SELLING SEASON - CROP YEAR_____CROP______________
Bushels of ______ stored on Farm _________ Bushels in Elev___________Total bushels to sell _________ Time Frame DollarsCash flow needed __________ _________ Bushels to Sell____________Cash flow needed __________ _________ Bushels to Sell____________Cash flow needed __________ _________ Bushels to Sell____________Bushels of _____ to sell & deliver by ________ Bushels to Sell____________
Month Strike Premium Re-ownership Strategies Buy Calls ___________________________________
Buy C Sell C ___________________________________
TODAY’S FUTURESContract High __________ Month Price Contract Low __________ _______ _______Difference __________ _______ _______1/3 Retracement __________ _______ _______1/2 Retracement __________2/3 Retracement __________
MONTH
TODAY’S CASHPRICE
BUSHELS TOSELL
CASH PRICEOFFEROPTIONSTRATEGIES
STRIKE
PREMIUM
Champ© Quarterly Marketing Plan Input Sheet
1998 Inventory - Old Crop Marketing Plan
Name _________________ Phone _____________ Date ________
Crop ___________ELEVATOR ON - FARM
Total Bu. ___________ ___________ ___________(bu. to sell)
DP Grain ___________ ___________ ___________
Under Loan ___________ ___________ ___________
LDP Bu. ___________ ___________ ___________
LDP Open ___________ ___________ ___________(bushels)
CASH FLOW NEEDSDEL.
DATE DOLLARS BUSHELS PRICE OBJ. DATE
___________ ________ ___________ _________ ________
___________ ________ ___________ _________ ________
___________ ________ ___________ _________ ________
BEST PRICE - SALES OBJECTIVES
DEL. DATETotal BU ___________ ___________
Price - BU ___________ ___________
Price - BU ___________ ___________
Price - BU ___________ ___________
Country Hedging’s Ag Marketing for Producers
Champ© Quarterly Marketing Plan Input Sheet
1999 Projections -- New Crop Marketing Plan
NAME ________________ PHONE _______________ DATE _______________
Crop ______________ Break Even __________
Planted Acres ______________
Program Base Acres ______________
Normal Yield ______________
Farm Program Yield ______________
APH for Crop Insurance ______________
Multi-Peril/CRC ______________
Percent to Hedge ______________
Percent to Protect W/Calls ______________
Percent to Min Price W/Puts ______________
County Loan Rate ______________
Normal Harvest Basis ______________
Percent To Hedge
Increments(%)/ Bu. Price Default Date Call Opt.
________________ ____________ ____________ ____________
________________ ____________ ____________ ____________
________________ ____________ ____________ ____________
________________ ____________ ____________ ____________
Percent to Min Price W/Puts
Increments Strike Prem. Default Date
________________ ____________ ____________ ____________
________________ ____________ ____________ ____________
________________ ____________ ____________ ____________
________________ ____________ ____________ ____________
* Boxed portion to be filled out by Branch Manager or Consultant
Country Hedging’s Ag Marketing for Producers
MARKET PLAN SUMMARY
KEEP IT SIMPLE
FARM BILL
Price Supports Then NowCorn $2.75 $1.89Wheat $4.00 $2.58Soybeans $5.02 $5.26
Contract Payments Declining and will phase out in 2002
Production/Supply Controls FOR and Set Asides no longer exist
DEVELOPING A MARKETING PLAN
10% Outlook Weather, Acres, Demand – UnpredictableSet Selling Zones for pricing your grain
90% Strategy Compensate or Defend against the unknown
SELLING SEASONS
Percent of Crop to Sell In each season – reduce/spread out risk
Default Dates If price targets are not met
Choice of Marketing Tool For each selling season
I AM WILLING TO USE THE FOLLOWING MARKETING TOOLS
_____ CASH SALES of crops in hand when price objectives are met or cash flow needsare met.
____ FORWARD CASH CONTRACTS when price objectives are met.
_____ HEDGE-TO-ARRIVE CONTRACTS when price objectives are met.
_____ SELL FUTURES CONTRACTS when price objectives are met.
_____ BUY PUT OPTIONS when price objectives are met, but production risk does not permit price commitment.
_____ BUY FUTURES CONTRACTS when cash sales are made, but price objectives are not met and prices are expected to move higher.
_____ BUY CALL OPTIONS when cash sales are made or cash flow needs occur, but price objective is not met and prices are expected to move higher.
_____ MINIMUM PRICE CONTRACTS when cash flow needs occur, but price objective is not met and prices are expected to move higher.
_____ SELL CALL OPTIONS on deferred futures contracts as a hedgeagainst falling prices.
_____ SELL PUT OPTIONS as a RE-OWNERSHIP strategy when prices are expected to trade in a sideways pattern for the life of the option.
I WILL USE THE MARKETING TOOLS I HAVE INDICATEDTO MAKE SALES TO MEET MY PRICE OBJECTIVESAND CASH FLOW NEEDS. I WILL LOOK FOROPPORTUNITIES.
I WILL MAKE SALES AS FOLLOWS:
DATE COMMODITY BUSHELS TOOL PRICE
November Soybean Seasonal
0%
25%
50%
75%
100%
3-D
ec
3-J
an
4-F
eb
4-M
ar
1-A
pr
30
-Ap
r
29
-May
26
-Jun
25
-Jul
22
-Aug
22
-Se
p
20
-Oct
18
-No
v
December Corn Seasonal
0%
25%
50%
75%
100%
5-J
an
2-F
eb
3-M
ar
31
-Mar
2-M
ay
31
-May
28
-Jun
27
-Jul
24
-Aug
22
-Se
p
20
-Oct
17
-No
v
16
-De
c
September Spring Wheat Seasonal
0%
25%
50%
75%
100%3
-Jan
31
-Jan
1-M
ar
1-A
pr
29
-Ap
r
28
-May
25
-Jun
24
-Jul
21
-Aug
19
-Se
p
July HRW Wheat Seasonal
0%
25%
50%
75%
100%
1-A
ug
29
-Aug
29
-Se
p
27
-Oct
25
-No
v
24
-De
c
26
-Jan
24
-Fe
b
24
-Mar
22
-Ap
r
20
-May
18
-Jun
17
-Jul
Marketing Tools
Basics
Pr ice Discovery
How are prices determined?
Opinions of hedgers and speculators looking at:
Supply
Demand
Political events
Psychology
Hedging
Definition:
Taking a position in futures that offsets the price risk associated with a physical position.
Why Hedge?
Protect margins
Determine a purchase price in advance of physical deliv-ery
Determine a selling price in advance of physical delivery
Expands pricing horizon
Futures Contract
Definition:
An Obligation to buy or sell a commodity that meets set standards on a specified future date.
Futures contracts are de-signed to reflect a product that is commonly traded in the physical market.
TransactionTypes
Terminology Price Advantage
Delivery vs.Offset
Sell
Buy
Hedging (Risk Shi f t ing)
Hedging:
Taking a position in futures which offsets your current physical position.
Futures accounts are marked to market every trading day and balanced via the margining process.
Owns GrainAt risk when prices de-cline
Seller of ContractsPosition gains in value when prices decline
Needs GrainAt risk when prices in-crease
Buyer of ContractsPosition gains in value when prices increase
Margin Example
Crop =
Contract size =
Minimum Tick =
Limit Move =
Initial Margin =
Maintenance Margin =
Day Buy/SellFutures Price
Dollar Change
Account Balance
Initial Trade
Steps to Hedging Review
Know Costs
Contract Specifications
Basis
Margin Requirements
Hedging CostsCommissionInterest
KnowledgeableBrokerLender
Market Plan
Two Components of Cash Bid
Nearby
Futures
Price
Local
Basis
Local Cash Price
Calculate Basis
Local Cash
Minus Nearby Futures
= Basis
Basis Components
Transportation
Handling Charges
Storage
Interest
Know Your Local Basis Pattern
Local Cash
Minus Nearby Futures
= Basis
The strongest basis last year
The weakest basis last year
Months with the strongest basis
Months with the weakest basis
Picking the Pr oper Mar keting Tool
ExpectedChange
Basis Basis WeakenStrengthen
Futures Prices
Up
Down
Expect Stronger Basis Higher Futures
Expect Stronger BasisLower Futures
Expect Weaker BasisHigher Futures
Expect Weaker BasisLower Futures
Store Grain
Delayed Price Contract
Sell FuturesBuy a Put Option
Sell Futures/Buy a Call
Basis Fixed Contract
Sell Cash/Buy Call
Sell Cash/Buy Futures
Sell CashForward ContractFutures Prices
Types of Opt ions
Put Opt ion
the right to sell
a futures contract
at a fixed price
before an expiration date
Call Option
the right to buy
a futures contract
at a fixed price
before an expiration date
Str ike Pr ice and Premium
Strike (Exercise) Price:
The fixed price at which the option holder has the right to buy (call option) or sell (put option) a futures contract.
The MGE, KCBT and CBOT wheat and corn strike prices are listed every ten cents per bushel. CBOT beans are listed every twenty-five cents.
Premium:
The cost of an option quoted in cents per bushel varies from minute to minute as the un-
derlying futures price changes
Put Premium
Example:
Buy a ______ put when futures are at $_______.
Increases in value as market falls Decreases in value to zero as market
rises
FuturesPrice
StrikePrice
OptionPremium
Cal l Premium
Example:
Buy a ______ call when futures are at $_______.
Increases in value as market rises Decreases in value to zero as market
falls
FuturesPrice
StrikePrice
OptionPremium
Put Opt ion Premium
Option premium is composed of two parts:
Intrinsic Value
Time Value
If futures = ______and Put Strike Prices = _____ _____ _____
Intrinsic Value = _____ _____ _____ minimum value
+Time Value= _____ _____ _____ volatility of futures time to expiration interest rates
Total Premium= _____ _____ _____
Cal l Opt ion Premium
Option premium is composed of two parts:
Intrinsic Value
Time Value
If futures = ______and Call Strike Prices= _____ _____ _____
Intrinsic Value = _____ _____ _____ minimum value
+Time Value= _____ _____ _____ volatility of futures time to expiration interest rates
Total Premium= _____ _____ _____
Options Relat ionship to Futures
Futures price= ________
Puts Calls
In the money _____ _____
At the money _____ _____
Out of the money _____ _____
Put Opt ion - Buyers and Sel lers
Put Option Buyer Put Option Seller
Pays premium
Has right to exer-cise into a short fu-tures position
Pays no margin
Collects Premium
Obliged to accept long futures posi-tion if assigned
Insures put buyer by margining
Cal l Opt ion - Buyers and Sel lers
Call Option Buyer Call Option Seller
Pays premium
Has right to exer-cise into a long fu-tures position
Pays no margin
Collects Premium
Obliged to accept short futures posi-tion if assigned
Insures put buyer by margining
Calculat ing a Floor Pr ice
Buy a(n) _______ _______ _______ put month crop strike
Strike Price = ________
-Premium = ________
+ Basis = ________
Estimated Floor Price = ________
Estimated Floor Price:Minimum selling price as market declines; put op-tion gains value.
Unlimited Upside Potential:If market prices increase, net selling price = higher cash price minus premium paid.
Pay Premium:Premium paid in full up front — no margin obliga-tions.
Sel l Grain — Buy a Cal l
Sell grain for $_______ per bushel
Buy a(n) _______ _______ _______ call month crop strike
Cash Price = ________
-Premium = ________
Estimated Floor Price = ________
Estimated Selling Price:Minimum selling price as market price increases; call option gains value.
Unlimited Upside Potential:If market price decreases, net selling price = cash price minus premium paid.
Pay Premium:Premium paid in full up front — no margin obliga-tions.
Notes____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
Notes____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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