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by: Ms. Ari Lesch


Marketplace > Iowa State University > Economcs > ECON 338A > TOPICS DAIRY MARKTG
Ms. Ari Lesch
GPA 3.53


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This 22 page Class Notes was uploaded by Ms. Ari Lesch on Saturday September 26, 2015. The Class Notes belongs to ECON 338A at Iowa State University taught by Staff in Fall. Since its upload, it has received 76 views. For similar materials see /class/214447/econ-338a-iowa-state-university in Economcs at Iowa State University.




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Date Created: 09/26/15
New Generation Grain Contracts Econ 338C April 19 2007 Steven D Johnson Farm Management Field Specialist Presentation Objectives Highlight 7 Megatrends in the Grain Industry Identify Producer Challenges and Opportunities with New Generation Grain Contracts NGCs Introduce NGCs Describe and Provide Examples for each of 3 Primary Categories Review the Performance of Selected NGCs Draw Cautions Conclusions and Further Observations about NGCs The Seven Megatrends of the Commodity Grain Industry LargerScale Commodity Farms Producers Use of Crop Insurance Revenue Tools CRC RA wHPO and GRIP wHRO Rapid Growth in the BioFuels Industry Expansion of Grain Storage and PreHarvest Marketing Strategies Originating more Bushels by Grain Merchandisers Proliferation of Grain Production Contracts Advanced Risk Management Skills Source Johnson IS UE Farm Mgt 2007 Producer Marketing Challenges Inability to pull the trigger Excessive emotion that leads to indecision Complexities from a variety of traditional marketing tools futures and op ons Lack of discipline in following a marketing plan NGC Characteristics Producer initiates the contract with grain originator Futures only contracts HTAs nonroll Predetermined pricing rules Nondiscretionary Cargill ProPricing Discretionary Decision Contracts Commitment of delivery 5000 bushel increments corn Specified delivery period weeks or month Basis typically remains open or must be accepted at time of delivery NGC Categories Automated pricing averaging Cargill ProPricing A Managed hedging Cargill ProPricing Market Pros Combination contracts Decision Commodities Rally FCStone Accumulator Automated Pricing Advantages Automates decisions average price Overcomes pricing volatility Optimizes producer time Eliminates margin calls Capitalizes on seasonal averages Leaves the basis open A Contract December Corn 10 Year Average A Contract Performance ProPricing A Decem ber Cam WWWLarg prupricingLom A Consistency vs LH SeptiOct Average 1 1 ID 0913 D7D 050 030 010 1 Cl 03D 50 pdated an 7f122006 Managed Hedging Advantages Locking in higher futures prices Adding incentive for MarketPros performance Leaving basis open Taking the emotion out of the pricing decision Risks Dependent on the Market Pros performance No guarantee of final price Minimum contract size Service fee Approximately 005 per bushel Paid at final settlement of the sale of the grain Cargill Ag Horizon Contract 39 P e rfo rm 3 n ce 139 h MarketPros Chi DEC Cami Hartman 3139 g 111me fining c0111 Cargill Dec Corn Market 320 300 23m 250 240 22m 1M L u 13m 30mm Updated on Til EI EIDQE Combination Contracts Advantages Uses seasonal price trend May provide higher selling prices than existing futures prices May sell more bushels when futures are at higher prices Leaves the basis open Might allow for rolling futures should carry and basis warrant Risks May be difficult for producers to understand pricing and bushels commitment The issue of doubling bushels at high prices and kick out at low prices The use of overthecounter options used to offset futures pnces Decision Commodity Harvest Corn Delivery Rally Pricing Model Example Commodity Corn Start Date 010106 End Date 07312006 7 months Futures Month Dec 2006 CZ6 Floor Price 240 UpPoint 000 Throttle 320 lRally 7 months 303 230 268 260 a 240 a 220 a 200 7 180 2001 2002 2003 2004 2005 2006 CZ Floor 240 Throttle 5 UpPoint 000 Decision Commodities LLC Decision Commodity June Corn Delivery Rally Pricing Model Example Commodity Corn Start Date 010105 End Date 05312006 17 months Futures Month JUL 2006 CN6 Floor Price 250 UpPoint 000 Throttle 320 17 months R ll 300 7 234 290 Jan 1 to May 30 280 3968 263 263 264 2 0 2A0 220 200 130 2001 2002 2003 2004 2005 2006 CN Floor 250 Throttle 5 UpPoint 000 Decision Commodities LLC FCStone ACCUMULATOR Offered by country elevators through FCStone Prices bushels weekly over a set period of time at a Selling Price above current CBOT ACCUMULATOR DEC CORN SELLING PRICE 283 CURRENT DEC CORN FUTURES 270 3 KNOCK OUT PRICE DEC CORN 220 FCStone Example of 2006 Contract Offered December Corn Futures Chart Accumulator Selling Price 5233in H wily i i i J Jun 5w 0 NDV 35 Rb Mar 22 m Knock Out Price 2201bu Source wwmfumressourcz com 2006 Accumulator Contract Producer signs an Accumulator Contract with their local elevator The following information is known Accumulator Selling Price 283 no basis determined Bushels Offered 5000 Bushels Potential 10000 Accumulation Period 25 Weeks on Fridays beginning April 7th through September 29th Every Friday 200 bu are priced 283 futures as long as Dec CBOT futures have not closedsettled above this price or touched the 220 Kick Out price during any week of this Accumulation Period Benefits of NGCs from a Producer Perspective Benefits include discipline in pricing grain diversification of pricing reduces emotion and time eliminates margin calls Purdue University Ag Economics Report 2004 Cautions about NGCs Producer understanding the risks of production contracts production delivery and market price determination reading the contract for details Small service fee 002 to 005 per bushel Knowing number of bushels actually priced Timing basis decisions Placing too many bushels into any one NGC product and having it not perform Further NGC Observations Rapid adoption by merchandisers with strong producer relationships onfarm storage and access to trucks Multiple pricing periods beyond harvest Longer pricing periods up to 36 months Varying contract originators and delivery locations ethanol plants vs elevator Bundling input decisions with contracts Use of Crop Insurance with NGCs could lead to Acreage Contracts Source Johnson IS UE Farm Mgt et al 2007 Questions Steven D Johnson Farm amp Ag Business Management Field Specialist 515 2614215 sdiohnsiastateedu wwwextensioniastateedupok farmmanagementhtm IOWA STATE UNIVERSITY University Extension


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