How strong is your grain marketing knowledge?
When is the only time a deferred-price contract should be used:
When basis is weak and your price outlook is bullish
When basis is above normal and your price outlook is bullish.
When your outlook for prices is bearish.
Explanation:
A deferred-price contract leaves open downside price and basis risk and upside price and basis potential. It should only be used when basis is weak, your price outlook is bullish and on-farm storage is full.
The underlying futures price is at an excellent level and you can lock in a profit, but the futures market is clearly in an uptrend and the futures price outlook remains bullish.
Which strategy(s) should be used in this scenario?
Purchase a put option
Sell cash and buy a call option
Sell cash and buy futures.
Forward-contract price sale
Explanation:
This is a hedging strategy used to offset opportunity risk. When selling grain in the cash market, all marketers become exposed to upside price risk (opportunity risk) on those bushels. Opportunity risk represents the risk of selling in the cash market too soon, before prices have reached their peak.
When selling cash and buying futures, downside basis risk and upside basis potential are eliminated, regardless of the direction of upcoming futures price movement. Use this strategy only if basis is stronger than normal.
What is this chart showing:
Uptrend
Downtrend
Sideways Trend
Explanation:
These trends are formed as a market drifts lower, posting a succession of lower highs and lower lows. (The example chart shows June 2013 live cattle futures.) After trending sideways through the last half of 2012, the market broke down in January, slicing through the reaction low posted in late September. It then rallied (including an upside price gap) in February, but it barely retested the old price floor of the previous sideways trend. Then the slide began, with a succession of lower highs and lower lows.
Local cash corn price for delivery today is $3.75. The front-month corn futures price is $4.75. What is the spot-delivery corn basis?
- $.75
+ $8.00
- $1.00
+ $1.00
Explanation: Basis is simply the difference between local cash prices and the futures price at the Chicago Board of Trade (CBOT). Local cash price MINUS futures price.
It’s October and harvest is in full swing. Spot-market basis is normally -50¢ during harvest, but is currently at -$1.00. December corn futures are at $5.00. March futures are at $5.25 (forward-contract basis is -75¢ against the March contract; basis for late-winter delivery is normally -25¢). July futures are at $5.75 (forward-contract basis is -50¢ against July contract; basis for summer delivery is normally -25¢).
What marketing strategies are available to use in this scenario?
Hedge-to-Arrive contract
Minimum price contract
Cash forward-contract sale
Do nothing and fill the bins
Explanation:
Because spot-market and forward-contract basis are weaker than normal, these immediate marketing strategies are available:
- When current harvest-season basis is weaker than normal and March, May and July futures and basis levels are providing plenty of return to cover expected storage costs, “doing nothing” and filling the bins is an acceptable strategy.
- A Hedge-to-Arrive contract locks in price, but leaves basis open to be set ahead of designated future delivery time, making an HTA an acceptable strategy in this scenario.
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