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This presentation was produced and is copyrighted by Stewart- Peterson®, Inc. 2003-2005. Permission is granted for use by active AgEdNet.com® subscribers. All other use is prohibited.
STEWART-PETERSON and AGEDNET.COM are registered trademarks of Stewart-Peterson, Inc.
MK108 Understanding Ag Market Pricing Tools
Marketing Library
Traditional farmers …
• Spent most of their time and efforts on becoming efficient producers
• Marketing was often left to chance.• Grain was delivered at harvest and sold at
the day’s price.• Livestock was sold at
the offering price whenanimals were shippedto market.
USDA photo.
But today …
• Most farmers and ranchers realize that they can and should take some action to improve the prices they receive.
• Delivery to market and pricing do not need to happen at the same time.
• Marketing tools can control the time when selling prices are set.
Changes are affecting the markets …
• Government programs aim for more flexibility and more market freedom.
• Export markets are growing• Can be uncertain and fast-
changing• Demand may change from
year to year.USDA photo by Ken Hammond.
All this change is called “VOLATILITY.”
• Prices can swing sharply up and down.
• Wide swings in the market can be frightening if farmers lack knowledge.
• Or, market freedom can be profitable for farmers who have the market skills to take advantage of big market moves.
What is your market objective?
• Set selling prices when markets are high.
• Avoid setting prices when marketsare low.
• Doing this requires marketknowledge and market skills.
Marketing tools:
• Cash sale at delivery is risky. Harvesttime often has low prices.
• Forward contract sales can avoid pricing at harvesttime, but still may not offer the best price.
• Hedging with futures offsets sales or purchases to be made later in cash markets. Requires margin deposit.
• Hedging with options offers some price protection with no limits on the upside.
Marketing tools: Cash contract …
Advantages:• Exact price is known.• No margin money• Simple• Limited downside risk
Disadvantages:• Reduced flexibility• Must deliver at
contract price• Price usually below
futures price• Limited upside price
potential
Marketing tools: Using the futures market …
Advantages:• Selling price is known
with narrow range• Maximum flexibility• Competition
establishes price• Risk is transferred to
someone else
Disadvantages:• Requires knowledge• Requires margin
money• Requires difficult
decisions• Upside profit potential
is limited
Marketing tools: Using the options market …
Advantages:• Potential loss is
limited to premium• Competition
establishes price• Downside risk is
shifted to others• Upside profit potential
unlimited
Disadvantages:• Requires knowledge• Requires payment of
premium• Net price is reduced
by premium in uptrending market
• Requires difficult decisions
Some common contracts …
• Forward pricing before harvest• Price based on futures market• May call for later delivery
• Pricing after harvest• Holding unpriced grain can be risky.• If prices fall you must also pay storage costs.
• Deferred pricing contracts allow delivery to elevator but prices are set later.• Storage costs must be paid.• Elevator may go out of business.
Some common contracts (cont.) …
• Basis contracts fix basis but price is variable.• Producer typically receives 75 to 80% at
delivery.• Price is set at a later date.
• Minimum price contract offered by elevator• If prices rise, farmer does not benefit.
• Other types of cash grain contracts made by grain firms may vary by region.
This presentation was produced and is copyrighted by Stewart- Peterson®, Inc. 2003-2005. Permission is granted for use by active AgEdNet.com® subscribers. All other use is prohibited.
STEWART-PETERSON and AGEDNET.COM are registered trademarks of Stewart-Peterson, Inc.
www.agednet.com
800-236-7862
This presentation was produced and is copyrighted by Stewart- Peterson®, Inc. 2003-2005. Permission is granted for use by active AgEdNet.com® subscribers. All other use is prohibited.
STEWART-PETERSON and AGEDNET.COM are registered trademarks of Stewart-Peterson, Inc.
MK108 Understanding Ag Market Pricing Tools
Marketing Library
Traditional farmers …
• Spent most of their time and efforts on becoming efficient producers
• Marketing was often left to chance.• Grain was delivered at harvest and sold at
the day’s price.• Livestock was sold at
the offering price whenanimals were shippedto market.
USDA photo.
But today …
• Most farmers and ranchers realize that they can and should take some action to improve the prices they receive.
• Delivery to market and pricing do not need to happen at the same time.
• Marketing tools can control the time when selling prices are set.
Changes are affecting the markets …
• Government programs aim for more flexibility and more market freedom.
• Export markets are growing• Can be uncertain and fast-
changing• Demand may change from
year to year.USDA photo by Ken Hammond.
All this change is called “VOLATILITY.”
• Prices can swing sharply up and down.
• Wide swings in the market can be frightening if farmers lack knowledge.
• Or, market freedom can be profitable for farmers who have the market skills to take advantage of big market moves.
What is your market objective?
• Set selling prices when markets are high.
• Avoid setting prices when marketsare low.
• Doing this requires marketknowledge and market skills.
Marketing tools:
• Cash sale at delivery is risky. Harvesttime often has low prices.
• Forward contract sales can avoid pricing at harvesttime, but still may not offer the best price.
• Hedging with futures offsets sales or purchases to be made later in cash markets. Requires margin deposit.
• Hedging with options offers some price protection with no limits on the upside.
Marketing tools: Cash contract …
Advantages:• Exact price is known.• No margin money• Simple• Limited downside risk
Disadvantages:• Reduced flexibility• Must deliver at
contract price• Price usually below
futures price• Limited upside price
potential
Marketing tools: Using the futures market …
Advantages:• Selling price is known
with narrow range• Maximum flexibility• Competition
establishes price• Risk is transferred to
someone else
Disadvantages:• Requires knowledge• Requires margin
money• Requires difficult
decisions• Upside profit potential
is limited
Marketing tools: Using the options market …
Advantages:• Potential loss is
limited to premium• Competition
establishes price• Downside risk is
shifted to others• Upside profit potential
unlimited
Disadvantages:• Requires knowledge• Requires payment of
premium• Net price is reduced
by premium in uptrending market
• Requires difficult decisions
Some common contracts …
• Forward pricing before harvest• Price based on futures market• May call for later delivery
• Pricing after harvest• Holding unpriced grain can be risky.• If prices fall you must also pay storage costs.
• Deferred pricing contracts allow delivery to elevator but prices are set later.• Storage costs must be paid.• Elevator may go out of business.
Some common contracts (cont.) …
• Basis contracts fix basis but price is variable.• Producer typically receives 75 to 80% at
delivery.• Price is set at a later date.
• Minimum price contract offered by elevator• If prices rise, farmer does not benefit.
• Other types of cash grain contracts made by grain firms may vary by region.
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