Commodity Marketing Activity

1
Commodity Marketing Activity

• Chapter One

2
Marketing History

• Chicago 1840s - merchants buy corn from farmers
• 1850s - merchants buy corn on time contracts
  (forward contracts) to be delivered at a later
  date to minimize risk
• Speculators appeared, buying and selling forward
  contracts, not intending to take delivery of the
  corn, but make a profit

3
Marketing History

• Forward Contracts were traded on street curbs and
  in public squares
• 1850s Chicago merchants began trading forward
  contracts for wheat for eastern millers and
  exporters
• Board of Trade in Chicago had been established in
  1848 to promote commerce

4
Marketing History

• 1859 State of Illinois authorized Board to
  establish quality standards, measure, gauge,
  weigh, and inspect grain
• Trading moved from the street to the Board of
  Trade
• At first, very disorganized people disappeared
  before delivery, others couldnt pay

5
Marketing History

• 1865 Board required a Margin, standardized
  contract terms for quantity, quality, delivery
  procedures, and payment terms
• These standardized agreements were called Futures
  Contracts
• Grain Exchanges formed in Minneapolis, Duluth,
  Milwaukee, Omaha, Kansas City, St. Louis, Toledo,
  Baltimore, San Francisco, New York

6
Marketing History

• Chicago Mercantile Exchange in 1874 (Chicago
  Produce Exchange) for butter, eggs, poultry, and
  other farm products
• Exchanges continue to evolve as need arises
• Durum Futures contracts in Minneapolis

7
Marketing History

• 1922 Grain Futures Act - regulate trading
• 1936 Commodity Exchange Act made it illegal to
  fix prices
• 1974 Commodity Futures Trading Act est. the
  Commodity Futures Trading Commission as the
  independent federal body that oversees all
  futures trading in U.S.
• Exchanges today page 5

8
The Participants

• Commodity Exchange place to trade, rules
• Clearing House day-to-day settlement of all
  accounts, guarantees all contracts
• Brokerage House places orders for contracts for
  businesses or individuals (commission)
• Traders buys sells contracts on the exchange
  floor in open outcry

9
Traders

• Private Speculator try to make money buying
  selling
• Day Trader close their position before the end
  of the trading day
• Position Trader take relatively large positions
  in market and hold their position for a long time
• Floor Broker agent for customers
• Hedger use futures to offset risk of changing
  prices in the cash market. Transfer risk to
  speculators

10
Marketing Choices

• Cash Sales deliver your crop to elevator etc.
• Forward Contract negotiate now for delivery
  later
• Futures Contract agreement to buy or sell at a
  date in the future
• Hedging minimize risk in cash market
• Options on Futures Contracts right, but not the
  obligation to buy or sell a futures contract at a
  specified price

11
Hedging

• You have wheat
• You sell wheat futures contract
• If prices fall, you sell your wheat at the lower
  price, but realize a gain in the futures market
• If prices rise, works the opposite way
• Price is lock in

12
Cash Markets

• Basis Cash Price - Futures Price
• Ex 2.40 - 2.60 -.20 or 20 cents under
• Ex 2.55 - 2.54 .01 or 1 cent over
• Deferred Pricing Agreement deliver commodity,
  agree to set a price later
• Basis Contract type of Forward Contract, lock in
  a basis relating to a specified futures contract.
• Ex basis -.20 Cash 2.64 at selling time
• you will get 2.44

13
(No Transcript)