The Farmer’s Grain Marketing Guide - AgEcon Search
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January 2004
ER04-01
The Farmer's Grain Marketing Guide
Carl L. German
Extension Specialist, Marketing 208 Townsend Hall
University of Delaware Newark, Delaware 19717-1303
clgerman@udel.edu phone: 302-831-1317
-In collaboration withLinda Smith, Managing Editor, Top Producer, Farm Journal, Inc.
& Dr. Art Barnaby, Professor, Department of Agricultural Economics
Kansas State University
Cooperative Extension Education in Agriculture and Home Economics, University of Delaware, Delaware State University and the United States Department of Agriculture cooperating. Distributed in furtherance of Acts of Congress of May 8 and June 30, 1914. Delaware Cooperative Extension, University of Delaware. It is the policy of the Delaware Cooperative Extension System that no person shall be subjected to discrimination on the grounds of race, color, sex, disability, age or national origin.
i
Acknowledgements Funding for this project was provided by the Northeast Center for Risk Management Education, The Delaware Department of Agriculture, and Con Agra. The authors would also like to express their appreciation to the many contributors to this project. Specifically, Charlie Stubbs, Grain Merchandiser, Perdue Farms, Inc. deserves special recognition for his insights into the intricacies of the many marketing alternatives that are available to the grain farmer. His insights were very valuable to the Units written on Cash Marketing Alternatives and Basis.
ii
Prelude This publication is available as an interactive online e-learning course at . To learn more about the online course click on AgWeb Professional, scroll through the list of Market News advisory services to the bottom of the list to `The Farmers Grain Marketing Guide', listed under the heading On Line Learning. The course covers Market Planning, Cash, Basis, Hedging, Options, Crop Insurance, and Selected Resources. The interactive course is available on a fee basis from . This publication contains a descriptive version of the online course. Content questions regarding Units 1-5 and Unit 7 should be directed to Carl L. German, Extension Marketing Specialist, University of Delaware, Phone: (302) 831-1317 or email clgerman@udel.edu. Content questions regarding Unit 6 should be directed to Art Barnaby, Professor, Agricultural Economics, Kansas State University, Phone: (785) 532-1515 or email abarnaby@ksu.edu.
iii
Table of Contents
Extension Clause
i.
Acknowledgments
ii.
Prelude
iii.
Introduction
1
Unit 1. Market Planning
Introduction
1
Eight Basic Steps to Grain Market Planning
1
Establish Price Objective Based Upon Cost of Production
Keep Abreast of Market Developments
Learn to Use and Understand Historical and Current Basis Information
Select the Appropriate Sales Method
Become Familiar With Contract Information and the Language of the Marketplace
Plan Sales According to Cash Flow and Income Needs
Select a Broker
Make Necessary Adjustments
Market Planning Summary
4
Worksheet 1: Establishing Grain and Oilseed Maximum Sales Price 5
Objectives
Worksheet 2: Establishing Grain and Oilseed Minimum Sales Price 6
Objectives
Worksheet # 3: A Checklist for Grain Market Planning
7
Unit 2. Cash Market Alternatives
8
Introduction
8
Cash Sale/Spot/Daily to Arrive
8
How Does the Spot Sale Work?
Advantages to the Spot Sale
Disadvantages to the Spot Sale
Best Time to Use the Spot Sale
Test Your Understanding of Cash Sales
The Forward Cash Contract
9
How Does the Forward Contract Work?
Advantages of Forward Contracting
Disadvantages of Forward Contracting
Best Time To Use the Forward Cash Contract
Test Your Understanding of Forward Cash Contracts
The Cash Sale with Deferred Payment
10
Advantages of the Cash Sale with Deferred Payment
Disadvantages of the Cash Sale with Deferred Payment
Test your Understanding of Cash Sales with Deferred Payment
The Minimum Price Contract
10
How Does the Minimum Price Contract Work?
Advantages to the Minimum Price Contract
Disadvantages to the Minimum Price Contract
Best Time to Use the Minimum Price Contract
Test Your Understanding of Minimum Price Contracts
Other Cash Market Alternatives
12
The Basis Contract
12
Does the Basis Contract Work?
Advantages to the Basis Contract
Disadvantages to the Basis Contract
Best Time to Use the Basis contract
The No Price Established Contract
13
The Hedge-to-Arrive Contract
13
How Does the Non-roll Hedge-to-Arrive Contract Work?
Advantages to the Non-roll Hedge-to-Arrive Contract
Disadvantages to the Non-roll Hedge-to-Arrive Contract
Best Time to Use the Hedge-to-Arrive Contract
Test Your Understanding of Other Cash Marketing Alternatives
Unit 3. Basis: The Economics of Where and When?
14
Introduction
14
Using Basis in Making Grain Marketing Decisions
15
Basis Movement
15
Factors That Affect The Basis
15
Test Your Understanding of the Basis
Basis History
16
How to Use Basis Tables; An Example
Sample Basis Table
Test Your Understanding of Basis History
Putting Basis to Work
18
Basis Summary
18
Definitions
Test Your Understanding of the Basis
Unit 4. Options on Agricultural Futures
19
Introduction
19
Why Consider Using Options as a Marketing Alternative?
20
Example 1. Net Return When Your Sell Your Crop
What is an Option?
21
Trading Options
21
Option Pricing
22
The Three Most Important Things to Remember About Option Pricing
Option Deltas
23
Test Your Understanding of Options
Margin Requirements
24
Options Used for Price Protection
24
Advantages of Options
Disadvantages of Options
Best Time to Use Options for Price Protection
Test Your Understanding of Options
Settling Options Positions
26
Example 3. Buying and Offsetting a Put Option
Test Your Understanding of Options
Exercise 1. A Strategy for Buying Put Options
Exercise 2a. A Put Option for Price Protection -- Price Declines
Exercise 2b. A Put Option for Price Protection -- Price Rises
Exercise 3. Using Options as a Tool for Weather Markets
Exercise 4. Speculative Strategy -- Buying Calls for Staying Power
Common Terms When Using Options
30
Test Your Understanding of Using Options
Unit 5. Hedging in the Futures Market
31
Introduction
31
Futures Market Basics
31
Buying, Selling, Offsetting
32
The Margin
32
Financing Margin Accounts
33
Financial Tests
33
Worksheet #1: Margining a Hedge Account
34
Hedging in the Futures Market
35
The Production Hedge
35
Example 1a. Corn Production Hedge ? Price Declines
Example 1b. Corn Production Hedge ? Price Increases
Best Time to Use the Production Hedge
The Storage Hedge
36
Figure 1. Basis Narrowing Over the Storage Period
Example 2. Storage Hedge for Corn ? Price Declines
Best Time to Use the Storage Hedge
Worksheet # 2: The Storage Hedge Decision
38
Worksheet # 3: Calculating Returns to the Storage Hedge
39
Using the Basis
Test Your Understanding of Hedging in the Futures Market
True Hedgers Versus Selective Hedgers
40
Selective Hedging
Example 3. A Double Whammy
Advantages to Hedging
Disadvantages to Hedging
Test Your Understanding of Using Hedging in the Futures Market
Example # 4: The Production Hedge
Worksheet # 4: The Production Hedge Decision
43
Types of Orders
44
Hedging Summary
44
Test Your Understanding of Hedging in the Futures Market
Exercise #1: Production Hedge Case Problem
Worksheet # 5: Production Hedge T Account
46
Exercise #2: To Store or Not to Store
Exercise # 3: The Storage Hedge
Worksheet # 6: Storage Hedge ? T Account
49
Common Terms When Hedging
50
Test Your Understanding of Hedging in the Futures Market
The Hedging Game
51
Worksheet #1: Margining a Hedge Account
56
Unit 6. Managing Financial Risk With Crop Insurance and Marketing Tools
57
Managing Risk
57
Risk to Lenders
58
Basis Risk
Quality Risk
Current Risk-management Tools
59
Yield-based insurance Products
60
CRC or RA-HPO
61
CRC or RA-HPO and Marketing
RA or IP
61
Comparison of Revenue and Yield Loss Policies
63
Market Acceptance
Limitations of Revenue Insurance
63
Revenue Insurance Basis
Quality Losses
Macro Level Market Risk
Excel Budget
64
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