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!!!
Marketing 101: Lingo!
Jun 29, 2015
Jessica Johnson, UNL Extension Educator - Ag Economics, explains the terminology involved in marketing agricultural crops via futures and options on futures
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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
PanhandleAgEcon
go.unl.edu/pagecon
Adopted from: CME commodity Trading Manual
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