Understanding Markets and Marketing Randy Fortenbery School of - PowerPoint PPT Presentation

Art Understanding Markets and Marketing Randy Fortenbery School of Economic Sciences College of Agricultural, Human, and Natural Resource Sciences Washington State University

The objective of marketing is: • NOT to make money in the futures market. • NOT to sell at the highest price of the year. • NOT to generate accurate price forecasts. • TO minimize the risk associated with achieving a target level of income.

How is your grain price determined?

LO CA L ELEVATOR: Grade Grain Condition Grain Store Grain Reveal the first public price for grain SU BTERM IN A L ELEV ATOR : Linked to local elevator by rail, barge, or truck Often do not buy directly from farm ers M ajor function is to concentrate grain into large shipm ents Reveal second public price for grain . Basically the local elevator price plus transportation and handling costs. TERM IN A L ELEVATOR: Sell to export m arkets and processors. Do not buy from farm ers. Reveal third public price for grain . Sub-term inal price plus transportation and handling costs. EXPORT TERM INA L E LEV ATORS: Very concentrated industry. O ver half of the U.S. export capacity is owned by Cargill, Bunge, and Louis Dreyfus. O ffer the export price to com pete in the international m arket.

Futures Market • Sends price signals to the entire system • Actively used at all levels of the grain market chain EXCEPT the farm • Is unique in its application of financial leverage

Soft Red Wheat Futures – 9:25 yesterday Month Last Chg High Low Dec-16 400'4 -0'6 400'4 400'4 Mar-17 419'2 2'0 420'6 414'0 May-17 430'0 2'2 431'2 425'0 Jul-17 441'6 2'0 443'0 437'0 Sep-17 455'2 2'0 456'0 450'4 Dec-17 471'4 1'2 473'2 468'0 Mar-18 483'0 1'2 483'6 482'4 May-18 491'2 2'4 491'2 491'

July 2017 Futures Prices for Soft Red Winter Wheat

September 2017 Futures Prices for Soft Red Winter Wheat

July 2017 Futures Prices for Hard Red Winter Wheat

March 2017

https://markets.cahnrs.wsu.edu/Graph/Markets Dec 13 - $4.74

Basis and Price Formation Basis is the difference between a cash price at a specific location and the price of a particular futures contract. The cash price offered to a grain producer for any given marketing strategy is a function of local basis.

Basis Changes • The lower the cash price • The higher the cash relative to futures prices, price is relative to the weaker the basis. A futures, the stronger the weak basis is good for basis. A strong basis is cash buyers,and bad for bad for cash buyers,and cash sellers good for cash sellers.

Determination of Basis Major Factors • COST OF STORAGE: Determines basis over a given crop year. Also affects the price difference between a nearby and a distant futures contract in a given crop year. • COST OF TRANSPORTATION: Determines basis geographically.

Determination of Basis Other Factors: • Local supply and demand conditions • Grain quality • Intensity of local Competition

Soft Red Wheat Futures – 9:25 yesterday Month Last Chg High Low Dec-16 400'4 -0'6 400'4 400'4 Mar-17 419'2 2'0 420'6 414'0 May-17 430'0 2'2 431'2 425'0 Jul-17 441'6 2'0 443'0 437'0 Sep-17 455'2 2'0 456'0 450'4 Dec-17 471'4 1'2 473'2 468'0 Mar-18 483'0 1'2 483'6 482'4 May-18 491'2 2'4 491'2 491'

Recording Basis To record historical basis levels, collect closing futures prices for the contract closest to maturity (but not expiring in the current month) each Wednesday, and the corresponding cash price (collected later Wednesday or Thursday morning). Subtract the futures price from the cash price. Average the Wednesday basis calculations for each month to arrive at the average monthly basis level.

Odessa Washington White Wheat Basis Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2008/09 -$0.71 -$0.41 -$0.80 -$0.85 -$0.50 -$0.86 -$0.48 -$0.21 -$0.32 -$0.57 -$0.60 -$0.23 Jul Aug Sep Oct Nov Dec Jan Feb 2008/09 ‐ $0.71 ‐ $0.41 ‐ $0.80 ‐ $0.85 ‐ $0.50 ‐ $0.86 ‐ $0.48 ‐ $0.21 2009/10 -$0.41 -$0.40 -$0.62 -$0.82 -$1.09 -$0.92 -$0.81 -$0.72 -$0.65 -$0.61 -$0.54 -$0.60 Sep 2009/10 ‐ $0.41 ‐ $0.40 ‐ $0.62 ‐ $0.82 ‐ $1.09 ‐ $0.92 ‐ $0.81 ‐ $0.72 2010/11 -$1.32 -$0.96 -$1.21 -$1.22 -$0.85 -$0.86 -$0.70 -$0.61 -$0.67 -$0.43 -$0.47 -$0.13 Oct 2010/11 ‐ $1.32 ‐ $0.96 ‐ $1.21 ‐ $1.22 ‐ $0.85 ‐ $0.86 ‐ $0.70 ‐ $0.61 2011/12 -$0.51 -$0.72 -$0.74 -$0.66 -$0.73 -$0.75 -$0.37 Average -$0.74 -$0.69 -$0.86 -$0.96 -$0.82 -$0.88 -$0.66 -$0.51 -$0.55 -$0.54 -$0.54 -$0.32

Actual offer for August 2016 $5.87 per bushel Realized price $5

Actual offer for 2017 $4.85

Dice 70.00% 60.00% 50.00% 40.00% Probability 30.00% 20.00% 10.00% 0.00% 2 3 4 5 6 7 8 9 10 11 12 Value of Rolling Two Dice

2009/2010 White Wheat Cash Prices 80 70 60 50 40 30 20 10 0 $4.50 $4.75 $5.00 $5.25 $5.50 $5.75 $6.00 $6.25

2012/13 Crop Year White Wheat Cash Prices 90 80 70 60 50 40 30 20 10 0 $6.75 $7.00 $7.25 $7.50 $7.75 $8.00 $8.25

Fall 2015 White Wheat Prices 14 12 10 8 6 4 2 0 $5.40 $5.50 $5.60 $5.70 $5.80 $5.90

July 2015 Futures Weekly Prices 14 12 10 8 6 4 2 0 $4.75 $5.00 $5.25 $5.50 $5.75 $6.00 $6.25 $6.50

2015 July Wheat Futures Prices 25 20 15 10 5 0 $5.00 $5.50 $6.00 $6.50

2014 July Futures Prices 30 25 20 15 10 5 0 $5.50 $6.00 $6.50 $7.00 $7.50

Large World Wide Stocks 70.00% 60.00% 50.00% 40.00% Probability 30.00% 20.00% 10.00% 0.00% $6.00 $6.25 $6.75 $4.50 $4.75 $5.00 $5.25 $5.50 $5.75 $6.50 $7.00 Value of Rolling Two Dice

Normal World Wide Stocks 70.00% 60.00% 50.00% 40.00% Probability 30.00% 20.00% 10.00% 0.00% $7.00 $7.25 $7.75 $5.50 $5.75 $6.00 $6.25 $6.50 $6.75 $7.50 $8.00 Value of Rolling Two Dice

Low World Wide Stocks 70.00% 60.00% 50.00% 40.00% Probability 30.00% 20.00% 10.00% 0.00% $8.00 $8.25 $8.75 $6.50 $6.75 $7.00 $7.25 $7.50 $7.75 $8.50 $9.00 Value of Rolling Two Dice

Production Costs for Conventional Tillage Soft White Winter Wheat, More Than 18" Precipitation Quantity Price or Value or Item Per Acre Unit Cost/Unit Cost/Acre Gross Returns Wheat 80 bu Total Acres – 1000 = 80,000 bushels Variable Costs Seed: $20.70 Wheat Seed 90 lb $0.23 $20.70 Fertilizer: $77.80 lb Nitrogen (dry) 90 $0.66 $59.40 Phosphorous (dry) 30 lb $0.53 $15.90 lb Sulfur (dry) 10 $0.25 $2.50 Pesticides: $31.42 oz Osprey 4.75 $4.10 $19.48 Starane+Salvo 22 oz $0.50 $11.00 Excel 90 3.2 oz $0.16 $0.51 oz Brox M 1.6 $0.27 $0.43 Machinery: $55.10 gal Fuel 6.32 $3.50 $22.14 Lubricants 1 acre $3.32 $3.32 Machinery Repairs 1 acre $9.68 $9.68 acre Machinery Labor 1.12 $17.80 $19.96 Custom & Consultants: $10.18 acre Rental Sprayer 1 $1.93 $1.93 Rental Stubble Shredder 0.5 acre $11.00 $5.50 Rental Ripper Shooter 1 acre $2.75 $2.75 Other: $21.75 acre Crop insurance 1 $21.75 $21.75 $0.00 $0.00 Overhead 1 $10.85 Operating Interest 2 $6.24 Total Variable Costs $234.03 Variable Costs per Unit $2.93

Fixed Costs: Machinery depreciation $22.86 Machinery interest $13.11 Machinery insurance, taxes, housing, licenses $5.34 acre Land Cost* 1 $131.82 $131.82 *Based on Share Rent Percentage: Landlord 33.00% Tenant 67.00% Cash rent $0.00 Land taxes $6.33 Total Fixed Costs $179.45 Fixed Costs per Unit $2.24 Total Costs per Acre $413.48 Total Cost per Unit $5.17 Notes: 1 Covers legal, accounting, and utility fees. Calculated as 5% of operating expenses. 2 Calculated as 5.75% interest on operating capital for 6 months. Breakeven Analysis: - + 10% Base 10% Yield 80 Price 72.00 88.00 $3.25 $2.93 $2.66 Operating Cost Breakeven $2.49 $2.24 $2.04 Ownership Cost Breakeven $5.74 $5.17 $4.70 Total Cost Breakeven - + Base 10% 10% Price $5.50 Yield $4.95 $6.05 Operating Cost Breakeven 47.3 42.6 38.7 Ownership Cost Breakeven 36.3 32.6 29.7 83.5 75.2 68.3 Total Cost Breakeven

Conflicting Market Information

Actual vs. Forecast Price 2012 ‐ 2013 $8.80 $8.60 $8.40 $8.20 $8.00 $7.80 $7.60 $7.40 Oct ‐ 12 Nov ‐ 12 Dec ‐ 12 Jan ‐ 13 Feb ‐ 13 Mar ‐ 13 Winter Wheat Price Low of October forecast Range High of October Price Range Forecast

Actual vs. Forecast Price 2013 ‐ 2014 $7.60 $7.40 $7.20 $7.00 $6.80 $6.60 $6.40 Oct ‐ 13 Nov ‐ 13 Dec ‐ 13 Jan ‐ 14 Feb ‐ 14 Mar ‐ 14 Winter Wheat Price Low of October forecast Range High of October Price Range Forecast

Grain Marketing Plan Developing a

Definition • A grain marketing plan identifies a producer’s specific price objectives as the production and/or storage season progresses. • It then identifies strategies available to achieve the price objectives.

Definition cont. • While it may take several forms, it is generally most useful if it is written down, and reviewed relative to market conditions on a regular basis. • A marketing plan must be flexible. A producer must be able to adapt to market conditions if it becomes clear that an earlier price objective is not likely to be achieved.