Chicago Mercantile Exchange information sources

http://www.cmegroup.com/tools-information/index.html

2008

Next wk. normal

* 4/28/08

Gaps: $5.20, $5.405, $5.598Major risk: cutting tax creditFor ethanol

Max. Upside Potential: variable cost of ethanol production, tax credits,And gasoline-ethanol prices

Dec. 08 Corn

Nov. 08 Soybeans

Down-side Risk: Gap @ $10.54

Cash Flow Risk Ratio for Corn

50/50 Crop 1/3-2/3

Owners Renter Share Buyer

Cash flow cost per acre $458 $720 $318 $714

Govt. payments? -$9 -$9 -$4.50 -$9

Cash needed from sales $449 $711 $313.5 $705

Expected or actual yield (bu.) 185 185 92.5 185

Cash flow breakeven price $2.43 $3.84 $3.39 $3.81

Hedged market price ($/bu) $5.72 $5.72 $5.72 $5.72

Cash flow risk ratio 42% 67% 59% 67%

Cash flow R. R., $4.70 price? 52% 82% 72% 81%Interpretation: @ $4.70 price, Owners need to sell 52% ofcrop to cover cash-flow needs.

Partly from Dr. William Edwards, ISU Economics Department

April 08

Table 5. Example Net Worth Risk Ratios For Corn in Central Iowa

April 08   Owners Renters Crop-share Buyers

000 $ assets $3,350 $357.3 $250.2 1,721.7 000 $ liabilities $0 $185.3 $84.6 $596.0 000 Net worth $3,350 $172.0 165.6 1,125.7 Net worth risked

(10%) 335,000 17,200 16,560 112,570 Crop acres 600 600 600 600 Net worth risk ratio $558 $28.67 $27.6 $187.6 Max.Loss/bu.,norm. yld. $3.02 $0.155 $0.298 $1.01

Interpretation: A loss of $0.16/bu. (from cash-flow break-evenprice would reduce renter’s net worth by 10%.

Price for max. loss -$0.59 $3.68 $3.09 $2.80

Cash Flow Break-even & Risk Ratio for Soybeans

50/50

Crop 1/3-2/3 Owners Renter Share Buyer

Cash flow cost per acre $255 $503 $160.5 $523

Govt. payments? -$12 -$12 -$6 -$12

Cash needed from sales $243 $491 $154.5 $511

Expected or actual yield (bu .)/A 50 50 25 50

Cash flow breakeven price $4.86 $9.82 $6.18 $10.22

Hedged market price ($/bu ) $11.09 $11.09 $11.09 $11.09

Cash flow risk ratio 44% 89% 56% 92%

Interpretation: @ $11.09 price, Owners need to sell 44% ofcrop to cover cash-flow needs.

Partly from Dr. William Edwards, ISU Economics Department

April 08

Risk Ratio at $9.60/bu. price 51% 102% 64% 106%

http://www.farmdoc.uiuc.edu/agmas/reports/03_06/text.html

Univ. of Illinois does an annual evaluation of Ag Market Advisory Services. You can get the report at the above web address.

Assignment: Working individually or in teams of 2-4 people, answer these questions:1. For the advisory services as a group, how much better in average cents per bushel are they than the average price receivedby farmers? __________corn _____________ soybeans2. For the services as a group, how does their average price compare with the 20-month market benchmark? Corn _____Soybeans _______________ .3. For the services as a group, how does their average price compare with the 24-month market benchmark? _________ Corn, _______________ Soybeans.

Assignment II: Advisory Service Performance

http://www.farmdoc.uiuc.edu/agmas/reports/03_06/text.html

Univ. of Illinois annual evaluation of Ag Market Advisory Services, assignment, cont.

Questions:1. Has any one advisory service been able to beat the 24 month market benchmark every year over the study period? On Corn? ____________________. On Soybeans? ____________________.2. How much does the ranking of individual advisory services vary from year to year? ____________________________ .3. Brock is an advisory service used by Cargill in some of its Contracts. On average, how has Brock ranked among advisoryServices? On corn?________ On soybeans?________Pro Farmer is headquartered in Cedar Falls, Iowa. How has it Ranked among advisory services? On corn?________Soybeans?____________________________.

Storage Economics

• Costs to store on & off farm

• Seasonality of prices• Harvest basis & carrying charge

• Timing and amount of cash-flow needs

Post Harvest Seasonal Price Trends

Fact: Since 1990, the May cash corn price has exceeded October in 14 of 17 years (82%).

Seasonal Price Movements in Iowa Corn Prices, 1990-2006

210

215

220

225

230

235

240

245

cents

per

bush

el

Fact: Since 1990, the May cash soybean price has exceeded October in 12 of 17 years (71%).

Post Harvest Seasonal Price Trends

Seasonal Price Movements in Iowa Soybean Prices, 1990-2006

545

555

565

575

585

595

605

615

cent

s pe

r bu

shel

July $3.34

May $3.32

March $3.27

Dec. $3.17

CBOT Corn Futures: October 16, 2006

What determines price differences between delivery months (e.g. December vs. March corn)? Is it expectations?

These price differences reflect market determined storage costs (aka carrying charges). Large carrying charges, where deferred contracts trade at a premium to nearby contracts, are common when free supplies are large.

Carrying Charges and Selling the Carry

 

Nov. $7.29

Mar $7.10

May $6.65

Jul $6.50

Aug. $6.27

Carrying Charges and Selling the Carry

Store grain today and…

sell tomorrow?!?

Decision Tree for Sizing Up the Market

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

 

Price as of 04/18/08 11:15AM CDT. Refresh for current price

.

Jewell 4/24/08

Basis Cash Price

Futures

Price April 08 C8K -0.40 5.41 5804 May 08 C8K -0.37 5.44 5804 J une 08 C8N -0.43 5.51 5934 J uly 08 C8N -0.41 5.53 5934 August 08 C8U -0.34 5.69 6024 FH Sep 08 C8U -0.31 5.72 6024 LH Sep 08 C8U -0.40 5.63 6024 October 08 C8Z -0.43 5.62 6050 November 08 C8Z -0.40 5.65 6050 December 08 C8Z -0.36 5.69 6050 J anuary 09 C9H -0.41 5.73 6134 February 09 C9H -0.39 5.75 6134 March 09 C9H -0.37 5.77 6134 April 09 C9K -0.37 5.92 6290

April 08 MayJuneJuly August FH Sep LH Sep

October November December January 09 February

MarchApril 09

Store or sell now?Market Signals?

YearDec

10/15July 10/15

Dec/Jul Carry

1990 2.28 2.47 0.19

1991 2.46 2.67 0.21

1992 2.10 2.29 0.19

1993 2.49 2.63 0.15

1994 2.18 2.41 0.23

1995 3.28 3.33 0.05

1996 2.87 3.01 0.14

1997 2.90 3.07 0.17

1998 2.27 2.50 0.23

1999 1.99 2.23 0.23

2000 2.07 2.32 0.25

2001 2.06 2.32 0.26

2002 2.54 2.66 0.12 

2003 2.17 2.31 0.15

2004 2.07 2.31 0.24

2005 2.04 2.31 0.27

2006 3.17 3.34 0.16

2007 3.62 3.98 0.36

Ave. 2.47 2.67 0.20

What is the carry?

CBOT Corn FuturesCarrying Charges

at Harvest

SOYBEANS

+/- Roland Nevada Burg Zearing Story Gilbert Kelley ADM IF

Apr -4 12.85 12.85 12.85 12.85 12.85 12.85 12.87 13.17 13.07

May -4 12.85 12.85 12.85 12.85 12.85 12.85 12.87 13.17 13.18

Jun -4 12.89 12.89 12.89 12.89 12.89 12.89 12.91 13.23  

Jul -4 12.92 12.92 12.92 12.92 12.92 12.92 12.94 13.26  

Oct08 -19 11.36 11.36 11.36 11.36 11.36 11.36 11.38 11.51  

Jan09 -19 11.51 11.51 11.51 11.51 11.51 11.51 11.53 11.66  

4/23/08Heart of Iowa Cooperative

YearNov

10/15July 10/15

Nov/Jul Carry

1990 6.14 6.60 0.46

1991 5.48 5.89 0.40

1992 5.35 5.64 0.29

1993 6.15 6.34 0.20

1994 5.39 5.74 0.35

1995 6.57 6.87 0.30

1996 6.93 6.86 (0.06)

1997 7.05 7.29 0.25

1998 5.56 5.90 0.34

1999 4.92 5.21 0.29

2000 4.65 5.01 0.36

2001 4.29 4.46 0.26

2002 5.48 5.52 0.04

2003 7.30 6.66 (0.64)

2004 5.14 5.39 0.25

2005 5.90 6.17 0.28

2006 5.89 6.31 0.42

2007 9.87 10.28 0.41

Ave. 6.00 6.22 0.22

What is the carry?

CBOT Soybean FuturesCarrying Charges

at Harvest

Contract 15-Oct 15-May Change

1980 3.05 2.82 (0.23)

1981 3.74 3.53 (0.21)

1982 3.31 2.78 (0.53)

1984 3.49 3.44 (0.05)

1985 2.93 2.78 (0.16)

1989 2.97 2.76 (0.21)

1996 3.33 4.88 1.55

1997 3.01 2.82 (0.19)

1998 3.07 2.46 (0.61)

2007 3.34 3.72 0.37

2008 3.98

Average 3.22 3.20 (0.03)

Eight of ten years (80%) the July declined, an average of 3 cents per bushel for all years.

Years after 1980 when July corn was greater than $2.90 at harvest.

Are Market Prices High?CBOT July Corn Futures

Sizing Up the MarketCumulative Variable On-farm Storage Costs ($/bushel)

Assumes…

8% interest rate

$3.00/bu cash corn$4.00/bu cash wheat$7.00/bu cash soybeans

In/out costs* of…8 cents/bu corn11 cents/bu soybeans8 cents/bu wheat

* Based on estimates of NDSU Extension Service

Months CornSoybean

s Wheat

1 $0.10 $0.16 $0.11

2 $0.12 $0.20 $0.13

3 $0.14 $0.25 $0.16

4 $0.16 $0.30 $0.19

5 $0.18 $0.34 $0.21

6 $0.20 $0.39 $0.24

7 $0.22 $0.44 $0.27

8 $0.24 $0.48 $0.29

9 $0.26 $0.53 $0.32

10 $0.28 $0.58 $0.35

11 $0.30 $0.62 $0.37

12 $0.32 $0.67 $0.40

On-farm Corn Storage Costs7 months (@ $5.78/Bu.)

• Extra shrink to 13% $0.145• Extra drying to 13% 0.04

• Interest @ 7% 0.236

• Handling 0.02• Quality deterioration (1%) 0.058

Total 0.499

$6.40 May call = $0.90/bu.

On-farm Corn Storage Costs3 months (@ $5.78/Bu.)

• Extra shrink to 13% $0.00• Extra drying to 13% 0.00

• Interest @ 7% 0.101

• Handling 0.02• Quality deterioration (1%) 0.00

Total 0.121

$6.40 May call = $0.90/bu.

Jewell Price premium, harvest to January = $0.11

Off-farm Corn Storage Costs8 months

• Extra shrink to 14% $0.08

• Extra drying to 14% 0.03

• Interest @ 7% 0.27 Handling 0.00

• Storage 0.225

• Total 0.605

• Price-later 0.495

On-farm Soybean Storage Costs: 3 months @ $11.36/Bu.

Interest @ 7% $0.20

• Handling 0.02

• Quality deterioration (1%) 0.00

Total 0.22

HOI Jan. 09 bid vs. Oct. 08 +0.15

http://www.card.iastate.edu/ag_risk_tools/basis_maps/

Theoretical Seasonal pattern for C. Iowa July basis

Transportation cost to Chicago

Storage costs to July delivery

$ Under July futures

0.0

0.50

0.25

Oct. Dec. Feb. April June July

Note Down-side Risk in Grain Exports, Reflecting Foreign Weather & Lagged Price Response

China: a wild card in the corn market

2007-09 projected net China exports: 16 mil. Bu., Future imports likely.

New Crop Corn Seasonal Trend

CBOT data

Source: U of MN, CFFM, 2007.

75% Odds: Spring Price

Exceeds Harvest Price

Net-Worth Risk Ratio

• The maximum dollars per acre which can be lost in any one year before a

predetermined percentage of the equity is lost.

Calculating Net-Worth Risk Ratio

• Max. dollars of net worth to be placed at risk divided by number

of acres = Max.$ that can be risked per acre

• To compute max. loss per bu. : divide $/A. by normal yld. = $/bu. that can be risked for pre-determined loss of equity

Mktg. Plan• Starting point in a mktg plan: financial

needs of the business

• Know your break-even price

• Know your risk-bearing ability• Plan marketing with a goal of at least

covering cash-flow needs• Look for mktg. & insurance tools to

minimize risk of losing the business• Role of Offer ContractsRole of Offer Contracts• TimingTiming

Before Biofuels BoomBefore Biofuels Boom

Before Biofuels BoomBefore Biofuels Boom

Before Biofuels BoomBefore Biofuels Boom

Before Biofuels BoomBefore Biofuels Boom

Key Points

• Starting point in a mktg plan: financial needs of the business

• Know your break-even price

• Know your risk-bearing ability

• Plan marketing with a goal of at least covering cash-flow needs

• Look for mktg. & insurance tools to minimize risk of losing the business Start Early

Marketing Tools

• Futures markets

• Options markets

• Elevator contracts

• New-generation contracts

• Storage on & off the farm

• Basis as a tool for determining where to

• sell & a partial answer to the “When to

sell?” question

Ways of Using Basis information for farmer

marketing• For evaluating forward

contracts• For pre-harvest & storage

hedging decisions• For market signals• For decisions about

ownership of grain or options

10 Traits of a Successful Grain Marketer

1. Starts Early (before planting)2. Knows production, storage costs & risk

bearing ability3. Understands basis & mkt. carry4. Follows several relevant markets daily5. Manages yield risk with revenue insurance6. Has discipline to price when goals are reached7. Knows various contracts & when to use them8. Relies on good sources of market information

9. Has an exit plan10. Keeps marketing records & evaluates results