Marketing 101: Lingo!

MARKETING 101:

LINGO!

Jessica Johnson – Asst. Extension Educator, Agricultural Economics Updated: 2/24/2014

PLEASE READ THE INSTRUCTIONS ON YOUR CARD,

DO NOT SHARE YOUR PRICE WITH ANYONE!

WE WILL BEGIN SOON!!!

Market Lingo 101…

Created with WORDLE

Marketing 101: Lingo!

Futures &

Options on

Futures

Cash Markets

Marketing 101: Lingo!

Futures &

Options on

Futures

Cash Markets

Futures

Video http://bcove.me/o73u89sm

01:20 – 2:30

http://bcove.me/zonshves Videos by CME Group

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

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

Market Commentary

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

Futures Market January 29, 2014

Futures Market January 29, 2014

Corn, March 2014

Futures Market January 29, 2014

Volume = # of contracts traded each day

Open Interest = # of contracts outstanding each day

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

Ups and Downs

Bullish Market – Up Market

Bulls attack by thrusting horns up!

Bearish Market – Down Market

Bears attack by swiping paws down!

Market Commentary

Differences Between Contracts

http://kneb.com/markets/market-quote.php?page=quote&sym=ZCl

Rural Radio Network Market Quotes

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

Differences Between Contracts

http://kneb.com/markets/market-quote.php?page=quote&sym=ZC

Rural Radio Network Market Quotes

Mar. – Dec = 0.108

Differences Between Contracts

http://kneb.com/markets/market-quote.php?page=quote&sym=ZC

Rural Radio Network Market Quotes

May – Dec. = 0.194

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!

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

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

Hedging…Buy Low, Sell High

Sell Futures Contract Buy Futures

Contract

Sell Commodity in Cash Market

Buy Futures Contract Sell Futures

Contract

Buy Commodity in Cash Market

Short

Lo

ng

Place Lift Cash Move

Example…Short December Corn

$5.00 Futures Price $4.00 Futures Price

Place Hedge – SELL DEC ‘14 CORN Lift Hedge – BUY DEC ‘14 CORN

Gain/Loss

$1.00 Futures Gain

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.

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

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

@CH14 C 4600

Contract Call or Put Strike Price

Price or Premium of the Option, not of the contract.

You can find similar information here http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn_quotes_globex_options.html

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

Put vs. Call Options

PU

T

Buy PUT and

pay premium

1. Offset: Sell PUT and get premium

2. Exercise: SELL underlying futures contract

3. Expire: Do nothing and lose premium

BUY Back

Futures

SELL in

cash

market

CA

LL

Buy CALL and

pay premium

1. Offset: Sell CALL and get premium

2. Exercise: BUY underlying futures contract

3. Expire: Do nothing and lose premium

SELL Back

Futures

BUY in

cash

market

-$0.30 buy Premium

+$13.00 sell cash

$12.70 net gain

You expect prices to fall.

You buy a $12 strike price November soybean put option for a premium of $0.30.

Prices rise.

The November cash price is $13.

Situation Expire

Example…Put November Soybeans

-$0.30 Buy Premium

+$1.30 Sell Premium

$1.00 option gain

+$12.00 cash sale

$13.00 net income

You expect prices to fall.

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

Situation Offset

Example…Put November Soybeans

Example…Put November Soybeans

You expect prices to fall.

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

-$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

Situation Exercise

Marketing 101: Lingo!

Futures &

Options on

Futures

Cash Markets

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

Cash Market INFO

“Cash Grain Reports”

Reported daily on the

Rural Radio Network

KRVN, KNEB, KTIC

http://kneb.com/index.php?page_id=wzwu7qf6&de

scription=Local_Cash_Grain_Bids

Western Nebraska Crop Prices

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

http://ams.usda.gov

Nebraska AMS Commodity Report

Marketing 101: Lingo!

Futures &

Options on

Futures

Basis Cash Markets

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

$4.11

Futures Market January 29, 2014

$4.11

-0.16

Futures Market January 29, 2014

Basis = Local Price – Nearby Futures Price

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

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

2013/14 W. NE Corn Basis

http://panhandle.unl.edu/c/document_library/get_file?uuid=5e6ae9bf-24d1-42a2-8e67-753e71ae81cf&groupId=131817&.pdf Western Nebraska Basis Patterns

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG

Corn Basis

2007/08-2012/13 Average Basis

“Ove

r”

“Und

er”

Local Price vs. Futures Price = BASIS

“Weak”

Lower or more negative than

expected

Market is NOT demanding grain

“Strong”

Higher or less negative than

expected

Market IS demanding grain

Image Source: Google http://www.naomilkoffman.com/2012/03/25/the-opposite-party/

Naomi L. Koffman, Mixed Media Artist

2013/14 W. NE Corn Basis

http://panhandle.unl.edu/c/document_library/get_file?uuid=5e6ae9bf-24d1-42a2-8e67-753e71ae81cf&groupId=131817&.pdf Western Nebraska Basis Patterns

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG

Corn Basis

2007/08-2012/13 Average Basis 2013/14

Basis Risk

Cash market and futures market do not move at the

same rate and or in the same direction.

Example…Short December Corn

$5.00 Futures Price

$4.75 Cash Price

-0.25 Basis

$4.00 Futures Price

$3.75 Cash Price

-0.25 Basis

Place Hedge – SELL DEC ‘14 CORN Lift Hedge – BUY DEC ‘14 CORN

Net Sale Price

$1.00 Futures Gain

$3.75 Cash Price

$4.75 net price

Example…Short December Corn

$5.00 Futures Price

$4.75 Cash Price

-$.25 Basis

$4.00 Futures Price

$3.50 Cash Price

-$.50 Basis

Place Hedge – SELL DEC ‘14 CORN Lift Hedge – BUY DEC ‘14 CORN

Net Sale Price

$3.50 Cash Price

$1.00 Futures Gain

$4.50 net Price

Example…Short December Corn

$5.00 Futures Price

$4.75 Cash Price

-$.25 Basis

$4.00 Futures Price

$3.90 Cash Price

-$.10 Basis

Place Hedge – SELL DEC ‘14 CORN Lift Hedge – BUY DEC ‘14 CORN

Net Sale Price

$3.90 Cash Price

$1.00 Futures Gain

$4.90 net Price

Marketing 101: Lingo!

Futures &

Options on

Futures

Basis Cash Markets

Questions/Comments?

Extension is a Division of the Institute of Agriculture and Natural Resources at the University of Nebraska-

Lincoln cooperating with the Counties and the U.S. Department of Agriculture.

University of Nebraska-Lincoln Extension educational programs abide with the non-discrimination policies

of the University of Nebraska-Lincoln and the United States Department of Agriculture.

Visit my website now!

Get current Panhandle price & basis information

TEXT “@UNLPREC” to 651-968-8358 Standard message & data rates apply.

Jessica Jo Johnson Asst. Extension Educator

Office: 308-632-1247

jjohnson@unl.edu

PanhandleAgEcon

go.unl.edu/pagecon

Adopted from: CME commodity Trading Manual