Ag Marketing and Prices Final Exam

If May feeder cattle futures are currently trading at $149.60, and the $136.00 call is trading for $16.00 (premium), how much intrinsic value is in the call?

$13.60

Its May and you sign a HTA contract for harvest. The futures price you sign for is $5.00. On that day, the basis they were offering for harvest is 30 under and the cash price offered for harvest is $4.70. At harvest, you deliver. The cash price that day is $4.40, and the basis is 40 under. What price do YOU get since you signed an HTA contract? $4.00 $4.40 $4.60 $4.70 $5.00

$4.60 $5.00 - $0.40 = $4.60

Today, an elevator is offering the following harvest prices: basis is -$0.40, cash price of $6.20, futures price is $6.60. A farmer signed an HTA contract. At harvest, basis is -$0.60, cash price of $6.50, futures price is $7.10. What price will the farmer receive?

$6.00 $6.60 - $0.60

Today, an elevator is offering the following harvest prices: basis is -$0.40, cash price of $6.20, futures price is $6.60. A farmer signed a FORWARD contract. At harvest, basis is -$0.60, cash price of $6.50, futures price is $7.10. What price will the farmer receive?

$6.20 locking in cash price right away

Today, an elevator is offering the following harvest prices: basis is -$0.40, cash price of $6.20, futures price is $6.60. A farmer signed a BASIS contract. At harvest, basis is -$0.60, cash price of $6.50, futures price is $7.10. What price will the farmer receive?

$6.70 $7.10 - $0.40 = $6.70

If May corn futures are currently trading at $5.70, and the $5.85 put is trading for $0.18 (premium), how much intrinsic value is in the put?

+$0.15

A farmer sells futures contracts for $4.75. Expected basis is +$0.25. She ends up getting a cash price of $4.20 and actual basis is +$0.20. Find the net price she received for her crop.

Always future price you entered at plus basis at the end $4.75 + 0.20 = $4.95 net price

The market price for underlying futures contract is equal to the price. Strike price of $3.50 and futures prices of $3.50. This means the option is ______________.

At-the-Money

When you expect basis to be weaker than normal at harvest When you still want the chance to gain if prices rise Fixes the basis but leaves the futures price open RISKY

Basis Contract

Today: Farmers receive 14.3 cents of every consumer's dollar spent on food....why?

Because they don't add much UTILITY most farmers produce a raw commodity and further steps along the supply chain add more and more value (add a higher and higher price) to the original commodity.

Gaps- Be able to identify them on a graph. What do they stand for?

Breakaway (at the beginning), Measuring (in the middle), Exhaustion (at the end), Common (nothing of significance)

Purchase the right to BUY a futures contract at a fixed price (strike price) before an expiration date for a certain fee (Premium) For people that want a LOW price

CALL Option

__________ = LOCAL price __________= WORLD price or global price

Cash Futures

Basis =

Cash - Futures

Small Numbers Short Time Necessity

Inelastic

Do ag goods tend to have more elastic supply or more inelastic supply? WHY?

Inelastic supply because they do perish

Amount gained from exercising an option

Intrinsic Value

In-the-Money means that the option has _____________ and means _______________________.

Intrinsic Value; You would want to exercise

A cattle feedlot purchased a call option in corn for $4.85/bu with a premium of $0.20. Current futures price is $5.00. Find intrinsic value: Find time value: Find TOTAL value:

Intrinsic value: $0.15 Time value: $0.05 ($0.20-$0.15) TOTAL value: just ADD together ◦$0.15 + $0.05 = $0.20

Why is understanding the basis vital for farmers?

They use it to determine their best time to: buy and sell grains the type of marketing alternative to use (futures, options, and/or a cash sale), and when to accept a supplier's offer or a buyer's bid.

If May corn futures are currently trading at $4.70, and the 4.85 put is trading for $0.18, find time value. Then, find the TOTAL VALUE.

Time value = $0.18-$0.15 = $0.03 Total value = $0.15 +$0.03 = $0.18

If basis weakens compared to expected basis, a soybean farmer who hedged with futures could see his net price fall below that established when he sold futures. True False

True

Storing corn primarily adds time utility. True False

True

T/F: For a short hedger, if prices rise, the higher cash purchase price is offset by a loss in the futures market.

True

T/F: If basis strengthens compared to expected basis, an ethanol plant bought futures could see their net price rise above that established when they bought futures.

True

True or False BASIS links the local price to the world price

True

True or False Both a PUT Buyer and a CALL Buyer pay premiums and pay no performance bonds (margin accounts)

True

True or False Both a PUT Seller and a CALL Seller collect premiums and insure the put/call buyer by paying a performance bond (margin account).

True

True or False If you WOULD exercise an option, it has intrinsic value

True

True or False: Hedgers AND Speculators should both use Fundamental and Technical Analysis

True

How to (almost) eliminate the risk of prices falling...but (almost) eliminate the chance of getting a high price Low risk; low reward

Using Futures

How to minimize the chance of getting a really bad price but still enabling you to get a good price- this is like insurance- it only kicks in if the price is bad and YOU get to pick the price it kicks in at. Functionally, most similar to a Minimum Price contract for farmers

Using Options

FORM Utility:

WHAT form it is needed in calf > sale barn > carcass seed > corn

TIME Utility:

WHEN it is needed refrigeration or storing in freezer storing grain

PLACE Utility:

WHERE it is needed feedlot>sale barn>grocery store on campus

The buyer gives an estimated price of $4.80 at harvest but you don't have storage capacity on your farm. You get a delayed price contract and have 8 months to set a price but will be charged $0.05/month. You deliver Nov 1. On March 1 (4 months later), the cash price is $5.10 and you decide to lock that in. What price would you get?

You'll get a price of $4.90 $5.10 - ($0.05*4) = $4.90

Which of the following groups would most prefer a strengthening basis? a) Corn farmer with a hedge-to-arrive contract b) Cattle producer with a call option in corn c) Ethanol plant that is long futures d) Soybean farmer with a basis contract

a) Corn farmer with a hedge-to-arrive contract

A cattle producer is short futures in live cattle. The cattle futures price has recently begun falling. The margin account will a) Increase in value b) Decrease in value c) Remain unchanged

a) Increase in value

Which of the following situations would cause demand for US beef to become more elastic? a) Moose (another type of red meat) are fully domesticated and become popular. b) Severe declines in global pork production due to a new disease. c) Price of US beef falls d) A drought kills a lot of cattle

a) Moose (another type of red meat) are fully domesticated and become popular.

If a producer has corn growing in the field, he or she has a.... a. Short cash position b. Long cash position

b. Long cash position

Most corn farmers will take the following initial position to protect the price for what they are producing: a.Buy futures contracts b.Sell futures contracts

b. Sell futures contracts

Which of the following would most likely result in a weakening local soybean basis for Brookings? a. higher crop insurance subsidy rates by the US government. b. a new GM variety increases yields by an average of 5 bu/ac in local farms c. The trade war with China ends, abolishing tariffs on US soybeans d. weather that increases the quality of corn

b. a new GM variety increases yields by an average of 5 bu/ac in local farms

What is the primary reason that farmers receive a low percentage of every $1 spent on food? a. customers don't realize how hard farmers work so they don't pay farmers enough b. government taxes farmers too much c. most farmers produce a raw commodity and further steps along the supply chain add more and more value (and hence a higher and higher price) to the original commodity. d. middlemen take advantage of farmers and take money from farmers

c. most farmers produce a raw commodity and further steps along the supply chain add more and more value (and hence a higher and higher price) to the original commodity.

Would each purchase a PUT or a CALL? Cattle feedlot operator who needs feeder cattle: Corn producer: Flour mill needing to purchase wheat: Feedlot protecting the purchase price of corn: Soybean crush facility protecting selling price of soybean meal: Soybean crush facility who needs to purchase raw soybeans: Cattle feedlot operator looking to sell live cattle to a slaughter facility:

call put call call put call put

Marketing strategies that have no price protection include:

cash (or spot) sales, delayed pricing contract, storing grain without hedging

Which producer is short cash and long futures? a) A corn producer who hedged this upcoming year's harvest b) A soybean crush facility who hedged their planned soybean oil sales c) A cow-calf producer who hedged in feeder cattle futures d) A feedlot who hedged in feeder cattle futures

d) A feedlot who hedged in feeder cattle futures

Cash Price =

futures price + basis

More substitutes =

more elasticity

A basis that becomes more positive or less negative over time is said to ____________; one that becomes less positive or more negative is said to _______________.

narrow or strengthen widen or weaken

Time Value =

options premium - intrinsic value

A hedgers goal is to ________ risk while a speculators goal is to _________ risk and make a profit.

reduce take on

Long cash; Short Futures = Short cash; Long Futures =

sell futures buy futures

The fixed price at which the option holder has the right to buy or sell futures

Strike Price

If you anticipate buying calves to put into your feedlot, to get rid of some of your price risk for your upcoming feed cost, you could ___________________ a corn futures contract. a. buy b. sell

a. buy

If live cattle futures fall by $2.00, what should happen to CALL premiums?

Decrease

If soybean futures RISE by $0.50, what should happen to PUT premiums?

Decrease

If the corn futures price moves up $1.00, you would generally expect the corn put option premium to: A.Increase in value B.Decrease in value C.Remain the same Would you be willing to pay more or less money to purchase the right to sell corn at $4.50 now that corn is worth $5.00 instead of $4.00?

Decrease in value

Good way to not have to deal with storage but not be stuck with the typically-low harvest prices Since you no longer own the crop, you can't get certain loans RISKIEST type of contract

Delayed Pricing Contract

You can get the crop priced anytime within a specified range This is NOT storage: ownership of the crops passes to the buyer. However, you still have to pay the buyer to hold your crops until you set the price Cash price you lock in MINUS storage fees

Delayed Pricing Contract

Large Numbers Long Time More Substitutes

Elastic

T/F: Let's say your maintenance margin is $2,500 and your initial margin is $2,750. If your margin account dips to $2,400, you'll have to deposit $100 into the account.

False

Hedging with futures is like gambling- it's a very risky tool that is used to try and get the highest profits possible. True False

False - all about REDUCING risk FOR FARMERS

Setting a basis contract fixes the cash price a farmer will receive for that good. True False

False - fixes the basis

If basis is 60 over and cash price is $4.50, than futures price is $5.10. True False

False - futures price should be $3.90

A hedge-to-arrive contract would be beneficial to you if the futures price RISES after signing the contract. True False

False - if it rises BEFORE

Fundamental analysis includes analyzing bar or candlestick graphs to look for emerging price patterns. True False

False; that's technical analysis

Who can contract more acres earlier? Farmer A whose 10-year yields vary between 180-200 bu/acre, with an average of 190 bu/ac - more certainty in yields OR Farmer B whose 10-year yields vary between 30-240 bu/acre, with an average of 210 bu/ac?

Farmer A - more certainty in yields

Eliminates price risk BUT eliminates the chance to earn more if the price rises Generally a relatively low price will be offered Offers guaranteed revenue and little to no risk. Locking in the cash price

Flat (fixed) Forward Contract

Its July and you enter into a contract with your local elevator that offered you a fixed price of $5.20/bu of corn at harvest. At delivery you will receive $5.20/bu regardless of what the actual cash price is at that time. What type of contract is this? Spot Sale Flat or Forward Price Contract Basis Contract Delayed Price Contract

Flat or Forward Price Contract

A farmer who's worried about falling prices, hates risk, and doesn't want to deal with the futures market would sign a __________ contract.

Forward

A farmer sells futures contracts for $4.75. Expected basis is +$0.25. On the day she exits the futures market, the futures price is $5.00 and actual basis is +$0.25. Find the net price she received for her crop.

Futures price + ending basis = $5.00 net price

Fixes the futures price but leaves the basis open Basis is more stable so this isn't as RISKY as a Basis Contract

HTA Contract

Lock in a price No change for a higher OR lower price Greatest protection from risk

Hedge w/ Futures

Pay premium upfront for the option to enter the futures market if desired Leave open potential for price improvement No margin account (all payments due up front)

Hedging w/ Options

A green candlestick means that the close was ________ than the open while a red candlestick means the close was _________ than the open.

Higher; Lower

Short Futures = ________ a contract Long Futures = _________ a contract

Selling; SELL futures Buying; BUY futures

Demand was about SUBSTITUTES. Supply is about TIME. Which has the more elastic supply? Wine farm in a year Corn farmer before planting Corn farmer in 20 years

Corn farmer in 20 years

A stocks-to-use ratio higher than average will mean prices are _____ (high or low).

Low; If the stocks-to-use ratio is high, it means we have more supply compared to normal than demand, so prices will be low.

Higher the price = ___________ the stocks to use ratio

Lower

POSESSION Utility:

Making it easy for the consumer to take ownership Food truck on campus grocery store

Turning society's wants and desires into profitable opportunities Process that involves some activities which creates value for customers, clients, and society as a whole. Farmer HAS CONTROL

Marketing

Price determination Why prices are what they are and why they change Place where buyer and sellers encounter each other in order to trade goods and services for value Farmer has NO CONTROL

Markets

Marketing Contracts and their RISK from Greatest to Least

Spot Sale and Storing Grain not Hedged Delayed Pricing Basis HTA Forward

If you are Short Cash you _________ the crop/livestock but if you are Long Cash you ___________ the crop/livestock.

NEED; OWN

Out-of-the Money means the option has _____________ and also means that _______________.

No Intrinsic Value; You would NOT want to exercise

If a corn farmer wants to hedge and sees a BUY signal, does that mean the corn farmer should enter his hedge by BUYING?

No; not always

Purchase the right to SELL a futures contract at a fixed price you pick (strike price) before an expiration date For a May contract, generally must exercise option by May 1st For a certain fee (Premium) For people that want a HIGH price

PUT Option

How Sensitive Quantity Demanded or Quantity Supplied is to a Change in Price

Price Elasticity

What are the 4 P's in marketing and how much control do farmers have over them?

Product - mostly have control over (GM, seeds, switching between crops) Price - a little power of what price they accept but not what the price is (contract, futures) Place - have some power of where they decide to sell Promotion - not much

Think of FUTURES like two separate markets- the futures market FOR FARMERS is about ___________ risk. The futures market FOR NONFARMERS is about gambling and hoping to earn a lot of money quickly and __________ risk.

Reducing; Taking on

If price is ABOVE the upper Bollinger band, __________. If price is BELOW the lower Bollinger band, __________.

SELL BUY

Short Hedgers _________ futures and like _________ prices. Long Hedgers _________ futures and like __________ prices.

Sell; HIGH Buy; Low

Spot Sale

Selling your grain at harvest

Butchering a carcass adds what type of utility? a) form b) time c) place d) possession e) all of the above

a) form

If wheat futures price falls from $5.50 to $5.30, you would generally expect the $5.40 put option premium to a) Increase in value b) Decrease in value c) Remain the same d) Unknown

a) increase in value

If food trucks were allowed on SDSU's campus, what type of utility would that primarily add? a) form b) time c) place d) possession

a) place b) possession

If basis strengthens compared to expected basis, a cattle producer who is long futures for their feed purchase could see the net price they pay for corn ______. a) fall b) rise c) remain unchanged d) rise, potentially above the price ceiling established.

a) rise

Assume you're a flour miller and decide to hedge your upcoming wheat purchase. At the time (August 15), December wheat futures are trading at $3.50 a bushel and the expected local basis for mid-November delivery is 12 cents over December futures. If you hedge your position, what is your expected price? a. $3.62 b. $3.50 c. $3.38

a. $3.62

If you own a feedlot and need to purchase corn for your upcoming feed needs, what is your position in the physical corn market? a.Short cash position b.Long cash position

a. Short cash position

Hedging involves a. Taking a futures position opposite to one's cash market position b. Holding only a futures contract c. Holding only a cash market position d. Taking a futures position identical to one's cash market position

a. Taking a futures position opposite to one's cash market position