economics 235 introduction to agricultural marketing john d. lawrence spring 2008

Economics 235 Introduction to Agricultural Marketing

John D. LawrenceSpring 2008

Course Overview

An overview of agricultural and food markets and marketing systems and how these are evolving in a rapidly changing global market place.

Course Topics

Overview of food chain structure and coordination - inputs through retail food

Wholesale and retail marketing activities, processing, transportation, margins

Course Topics Farm-level price behavior, pricing

systems, and marketing management

Price analysis, futures, options, contracts, and cooperatives

The role of government in agricultural markets

Course Objectives Understand practical marketing problems

and issues affecting: The “bottom line” of a business! How the system operates and how well! Resource allocation and efficiency!

Use principles to evaluate current events Ask and answer, “So what?”

Course Procedures

Discussion/ lecture combination. Read or complete the assignments

before coming to class. Apply principles in analyzing new

marketing issues or problems.

Resource Materials Class notes Reading assignments on web Basic text for the course:

The Agricultural Marketing System Guest speakers occasionally No cell phones!!!!!

One Required Lab

Market simulation One evening 6-9 pm Two nights to choose from

Tentatively late February

Class Web Site http://www.econ.iastate.edu/

classes/235 http://www.econ.iastate.edu/

faculty/lawrence/ Notes posted

Presentations can be downloaded and printed Resource materials and links Secrets are in the lectures!!!

Contacting Instructor

John Lawrence 468 Heady Hall, 294-6290 jdlaw@iastate.edu Office hours: by appointment

Juan Murguia 294-6740 murguia@iastate.edu

Grading

Two mid-term tests 40% Final exam 20% Homework, quizzes, project

and class participation40%

Grading Procedures

Homework due in class on assigned date 10% per day late penalty

Test and quizzes will be announced in class If you know you will be gone make

arrangements ahead of time

Class Project Team project Farm level analysis

Marketing plan Contract evaluation Strategic decision

Weekly Market Report Pick a commodity to follow all

semester Corn, Soybeans, Cattle, Hogs Weekly summary due each Tuesday Less than one page

Price change Margin account Market news

10 points per week possible

Definition A market is an arena for

organizing and facilitation business activities.

Define a market Form What Place Where Time When

Cash or Spot Market When: Immediate or near-term delivery What: Commodities

Defined by minimum standards Often set by USDA

Where: Typically at buyer’s location Elevator, processor, auction

Cash or Spot Market Examples

#2 yellow corn, Heartland Coop at Nevada, January 4, 2008, farmer to first handler.

#1 yellow soybeans, north central Iowa elevators, January 4, 2008, farmer to first handler.

Fed cattle 65-80% Choice, Nebraska feedlots, January 7, 2008, feedlot to packer

Iowa-S. Minnesota 51-52% Lean hogs, plant delivered, January 7, 2008, farmer to packer.

Medium-Large Frame steers 600-650 pounds, Dunlap Iowa Auction, January 3, 2008, cowherds to feedlots.

Futures markets Today’s price for products to be delivered in the

future. A mechanism of trading promises of future

commodity deliveries among traders. Biological nature of ag production

Prices not known when production decision is made

Processors need year around supply

Futures Market Exchanges

12 organized exchanges Two largest

Chicago Board of Trade (CBOT) Grains, interest rates http://www.cbot.com/

Chicago Mercantile Exchange (CME) Livestock, financial, currencies http://www.cme.com/

Combined for 75% of futures volume

Semester long assignment Choose and follow a commodity each week

throughout the semester. Due each Tuesday

Report the price, price change and calculate your margin account based on Friday’s close.

Brief (less than one page) analysis of factors that impacted the market the previous Monday – Friday

Sources for information Links also on class web site Cash

http://www.ams.usda.gov/LSMNpubs/index.htm Futures

http://www.cme.com/ Right-side menu “VIEW ALL DELAYED QUOTES” Then left-side menu “CME Commodities”

http://www.cbot.com/ Right-side menu

Analysis http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/

January 4th, 2008 issue has several suggestions for information http://www.lmic.info/memberspublic/membersreports.html http://www.tfc-charts.w2d.com/custom_menu.php3

Due Tuesday Jan 22 Pick a commodity Define the cash market and report the

price. Find and report the futures price for the

same commodity for Friday. Choose a contract month that expires after

the end of the class. July or later for corn, wheat, or soybeans June or later for cattle, feeder cattle and hogs

Futures Market Exchanges

Trading pits Centralized pricing

Buyers and sellers represented All information represented

Perfectly competitive market Open out-cry trading

The futures contract

A legally binding contract to make or take delivery of the commodity Form (wt, grade, specifications) Time (delivery date) Place (delivery location) Possession (seller delivers, buyer

receives)

The futures contract Standardized contract No physical exchange takes place

when the contract is traded. Deliveries are made when the

contract expires (delivery time) Payment is based on the price

established when the contract was initially traded.

Standardized contract Certain delivery (contract) months Fixed size of contract

Grains 5,000 bushels Livestock in pounds

Lean Hogs 40,000 lbs carcass Live Cattle 40,000 lbs live Feeder Cattle 50,000 lbs live

Specified delivery points Relatively few delivery points

Market position Objective: Buy low, sell high You can either buy or sell initially

Sell a December Corn contract initially Deliver corn in December OR, Buy back at a later date

Buy a February Live Cattle contract initially

Take delivery of cattle in February OR, Sell back at a later date

Margin account Highly leveraged trades

Margin is the earnest money that must be maintained in the trader’s account

Often 5-10% of full value Margin account settled everyday

Must maintain account balance Margin call

Calculate as if you had to get out of the market every day.

Margin Account Example Corn Contract

5,000 bushels @ $2.80 = $14,000 Margin = $500

Cattle contract 40,000 pounds @ $.70 = $28,000 Margin $1,000

Margin Account

Initial margin: The amount needed to open and account.

Maintenance margin: The minimum amount needed to keep and account open.

“Mark to the Market” at the close of each trading day.

Margin Account Example

Initial margin$1,000

Maintenance margin$800

Corn contract (5000 bushels) Day 1: Sell at 4.55

Margin Account Example

Day Price ChgG/LMargin1 4.54 +.01+5010502 4.58 -.04-2008503 4.61 -.03-150700Below Maintenance Margin. Must make $300 margin call to restore to initial margin

10004 4.52 +.09+4501450Changes reflect the initial “sell” of the contract