Econ 338C, Spring 2009 ECON 338C: Topics in Grain Marketing Chad Hart Assistant Professor/Grain...

Econ 338C, Spring 2009

ECON 338C:Topics in Grain Marketing

Chad HartAssistant Professor/Grain Markets Specialist

[email protected]


Today’s Topic

Farm Financials

&

Homework #1


Homework #11. Hedging: Holding equal and opposite positions in the cash and

futures markets.

2. In a hedge the net price will differ from your expected price only by the amount that the actual basis differs from your expected basis.

3. With a put option, the buyer pays the premium and has the right, but not the obligation, to sell a futures contract at the strike price.

4. With a call option, the seller receives the premium and is obligated to sell a futures contract at the strike price if the buyer uses their right.

5. With a call option, the buyer pays the premium and has the right, but not the obligation, to buy a futures contract at the strike price.

6. What is the most common reason crops fail? Drought


Homework #17. Expected Local Hedged Price =

Futures Price + Expected Basis – Commission

Corn SoybeansFutures Price $4.2725 $8.92Expected Basis -$0.25 -$0.25Commission -$0.01 -$0.01Expected Local Hedged Price $4.0125 $8.66

Cash Price = Final Futures Price + Actual Basis

Return from the Hedge = Initial Futures Price – Final Futures Price – Commission

Net Price = Cash Price + Return from the Hedge


Homework #17. b) 7. c)

Final Futures Price $3.75 $9.75Actual Basis -$0.10 -$0.65Cash Price $3.65 $9.10

Initial Futures Price $4.2725 $8.92Final Futures Price -$3.75 -$9.75Commission -$0.01 -$0.01Return from the Hedge $0.5125 -$0.84

Cash Price $3.65 $9.10Return from the Hedge $0.5125 -$0.84Net Price $4.1625 $8.26


Homework #18. a) Floor Price = Strike Price + Basis – Premium – Commission

Strike Price $8.20Expected Basis -$0.25Premium -$0.6325Commission -$0.01Floor Price $7.3075

8. b) A futures hedge (short hedge) or buying any put option at or above a $4.90 strike price will work.

Futures Hedge Put OptionFutures Price $4.2725 Strike Price $4.90Expected Basis -$0.25 Expected Basis -$0.25Commission -$0.01 Premium -$0.97125Net Price $4.0125 Commission -$0.01

Net Price $3.66875


Homework #18. c) Buying any call option with a strike price at or below $7.40 will

work.

Ceiling Price = Strike Price + Basis + Premium + Commission

Strike Price $7.40Expected Basis -$0.25Premium $1.85875Commission $0.01Net Price $9.01875


Call OptionThe Buyer pays a premium and has the

right, but not the obligation, to buy a futures contract at the strike price.

The Seller receives the premium but is obligated to sell a futures contract at the strike price if the Buyer uses their right.


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Futures Price, $ per bushel

Net

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Cash Price Call Option Cost Net Price

Buying a Call Option


Selling a Call Option

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Futures Price, $ per bushel

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Cash Price Call Option Cost Net Price

If futures > strike, Cash – Premium + Commission + Option Payout

If futures < strike, Cash – Premium + Commission

Option Payout = Futures price – Strike price


Homework #19. a) Insurance Payment = $4.00/bu * (65% * 200 bu/acre – 122 bu/acre)

= $32 per acre

Insurance Premium = $3.13/acre (from slide)

Net Insurance Payment = $32.00 – $3.13 = $28.87

9. b) Insurance Payment = (65% * 200 bu/acre * $4.04/bu – 122 bu/acre * $3.90/bu) = $49.40 per acre

Insurance Premium = $5.17/acre (from slide)

Net Insurance Payment = $49.40 – $5.17 = $44.23


Financial TermsCash Flow – The difference between cash

revenues and expenses moving through the business

Net Worth – Value of assets versus liabilities in the business

Income – The difference between total revenues and expenses moving through the business


Estimated 2009 Iowa Corn Costs

Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf


Estimated 2009 Iowa Corn Costs


Short run, need to cover cash flow costsSeed, fertilizer, chemicals, rent, insurance, etc.

Cash flow costs vary by structureCash renter, Share renter, Owner

Farmer choices: Fertilizer, crop insurance


Estimated Iowa Corn Per Acre Costs


2007 2008 2009

$ per acre

Machinery Costs 100.83 108.48 114.38

Seed, Chemicals, and Fertilizer 197.55 238.67 352.71

Labor 29.29 29.15 29.15

Land 155.00 190.00 205.00

Total 482.67 566.30 701.24

Bushels per acre

Expected Yield 156 157 157

$ per bushel

Cost per Bushel 3.10 3.62 4.48


Estimated Iowa Soy Per Acre Costs


2007 2008 2009

$ per acre

Machinery Costs 46.76 48.50 55.80

Seed, Chemicals, and Fertilizer 107.58 126.06 202.85

Labor 26.95 26.95 26.95

Land 155.00 190.00 205.00

Total 336.29 391.51 490.60

Bushels per acre

Expected Yield 50 50 50

$ per bushel

Cost per Bushel 6.73 7.83 9.81


Cash Flow CostsCash Flow Costs: the cash expenses paid to produce and market the crop

Land ownership structure affects cash flow costsRenter, owner, crop-share

Managerial decisions also affect cash flow costsCrop insuranceFertilizerEtc.


Cash Flow Costs: Renter vs. Owner

2007 2008 2009

$ per bushel

Corn

Renter 3.10 3.62 4.48

Owner 2.10 2.40 3.16

Soybean

Renter 6.73 7.83 9.81

Owner 3.63 4.03 5.71

Land rent is a cash flow issue for renters. Land owners do not face that cash flow cost.


Outlining Cash Flow Needs

What is your production plan?

Source: Edwards, http://www.extension.iastate.edu/agdm/crops/pdf/c3-15.pdf



What are your cash inflows?





Monitoring cash needs within and through the year

A positive cash flow for the year does not imply the farm can not get caught in a cash flow squeeze


Items to Consider for Cash Flow Production plan Inventory on hand Input requirements for production Estimated income from production Estimated income from other sources Estimated expenses for production Debt service Non-farm related income and expenses


Net Cash Flow for AssignmentCash Market Market in JulyCorn Soybeans Corn Soybeans

Per Acre Cash Flow Costs through Mar. 1 478.50$ 301.43$ 478.50$ 301.43$ Yield 160 46 160 46Per Bushel Cash Flow Costs through Mar. 1 2.99$ 6.55$ 2.99$ 6.55$

Storage Costs since Mar. 1 Date 4/9/2009 4/9/2009 7/1/2009 7/1/2009 Days since Mar. 1 39 39 122 122 Storage Costs (per bushel per day) 0.0006$ 0.0014$ 0.0006$ 0.0014$ Per Bushel Storage Costs 0.02$ 0.05$ 0.07$ 0.17$

Trucking Costs Miles to Market 6 6 6 6 Trucking Costs (per bushel per mile) 0.0060$ 0.0060$ 0.0060$ 0.0060$ Per Bushel Trucking Costs 0.04$ 0.04$ 0.04$ 0.04$

Net Cash Flow Costs 3.05$ 6.64$ 3.10$ 6.76$ Per Bushel Cash Flow Costs through Mar. 1 2.99$ 6.55$ 2.99$ 6.55$ Per Bushel Storage Costs 0.02$ 0.05$ 0.07$ 0.17$ Per Bushel Trucking Costs 0.04$ 0.04$ 0.04$ 0.04$


Current Assets and Liabilities


Current assets – cash or assets that can be converted to cash quickly

Current liabilities – debts that are due in a short time


Fixed Assets and Liabilities


Fixed assets – assets that will not be sold and are needed to maintain production

Fixed liabilities – debts that are due in a long time


Farm Net Worth


Farm Net Worth = Farm Asset Value – Farm Liabilities

Working capital = Current Assets – Current Liabilities Potential cash to cover additional expenses


Key Ratios


Current Ratio = Current Assets/Current Liabilities Measures ability to pay debts in the short term Ratio of 2 or higher indicates good ability Ratio of 1 or lower indicates possible issues

Debt-to-Asset Ratio = Total Liabilities/Total Assets Measures credit load versus asset value 30% to 40% is a common value for Iowa farms Farming can be an expensive livelihood and loans often provide the means of conducting it


Net Income

Source: Hofstrand, http://www.extension.iastate.edu/agdm/crops/pdf/c3-24.pdf

Income and expenses cover cash and non-cash related transactions. Profits and cash flow are not the same thing.


Iowa Averages, 1998-2007

Source: Edwards, http://www.extension.iastate.edu/Publications/FM1845.pdf


Iowa Corn Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Season-average Price Cost


Iowa Soybean Prices vs. Costs

Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

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Season-average Price Cost


Knowing Your Farm Financials

…Provides you several targets for your marketings

Do prices cover your cash expenses, meeting your cash flow needs?

Do prices cover your total expenses, providing profit and adding to your net worth?

On the production side, we often compare yields to trend; on the marketing side, we need to compare prices to per-unit costs.


Class web site:http://www.econ.iastate.edu/classes/econ338C/Hart/

See you next week!

Have a great VEISHEA!

Econ 338C, Spring 2009 ECON 338C: Topics in Grain Marketing Chad Hart Assistant Professor/Grain...

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