ECON 338C:
Topics in Grain Marketing
Chad Hart
Assistant Professor/Grain Markets Specialist
chart@iastate.edu
515-294-9911
Econ 338C, Spring 2009
Today’s Topic
Price Projections and Issues
with an update on the World Ag. Supply
& Demand Estimates report
Econ 338C, Spring 2009
Econ 338C, Spring 2009
Source: USDA, WASDE report, April 2009
Econ 338C, Spring 2009
Source: USDA, WASDE report, April 2009
Econ 338C, Spring 2009
Source: USDA, WASDE report, April 2009
Econ 338C, Spring 2009
Source: USDA, WASDE report, April 2009
Econ 338C, Spring 2009
3/21/2009
1/21/2009
11/21/2008
9/21/2008
7/21/2008
5/21/2008
3/21/2008
1/21/2008
11/21/2007
9/21/2007
7/21/2007
5/21/2007
3/21/2007
$ per bushel
July 2010 Corn Futures
7.50
7.00
6.50
6.00
5.50
5.00
4.50
4.00
3.50
Source: CBOT
Econ 338C, Spring 2009
6/21/2010
3/21/2010
12/21/2009
9/21/2009
6/21/2009
3/21/2009
12/21/2008
9/21/2008
6/21/2008
3/21/2008
12/21/2007
9/21/2007
6/21/2007
3/21/2007
$ per bushel
8
Likely Range
7
6
5
4
3
2
Example: CBOT July 2010 Corn Futures
Likely Range
Based on current futures and the option
premiums for options on those futures
They determine an implied volatility, a measure of
the expected variability of the futures price from
the current point on
If you take Econ 437, you’ll learn about the
mathematical models used to derive the implied
volatility
Given the volatility, we can outline the likely range
Econ 338C, Spring 2009
Econ 338C, Spring 2009
6/21/2010
3/21/2010
12/21/2009
9/21/2009
6/21/2009
3/21/2009
12/21/2008
9/21/2008
6/21/2008
3/21/2008
12/21/2007
9/21/2007
6/21/2007
3/21/2007
$ per bushel
8
Pricing Paths
7
6
5
4
3
2
Example: CBOT July 2010 Corn Futures
Econ 338C, Spring 2009
6/21/2010
3/21/2010
12/21/2009
9/21/2009
6/21/2009
3/21/2009
12/21/2008
9/21/2008
6/21/2008
3/21/2008
12/21/2007
9/21/2007
6/21/2007
3/21/2007
$ per bushel
8
Prices Could Be Higher
7
6
5
4
3
2
Example: CBOT July 2010 Corn Futures
Econ 338C, Spring 2009
6/21/2010
3/21/2010
12/21/2009
9/21/2009
6/21/2009
3/21/2009
12/21/2008
9/21/2008
6/21/2008
3/21/2008
12/21/2007
9/21/2007
6/21/2007
3/21/2007
$ per bushel
8
… Or Lower
7
6
5
4
3
2
Example: CBOT July 2010 Corn Futures
Market Situation
Reviewing recent past and the current
situation in the market
Using historical relationships to link
changes in key variables to changes in
commodity prices
Evaluating if current relationships differ
from historical patterns
Econ 338C, Spring 2009
Market Outlook
Interpreting market factors that impact
prices and shape marketing and
management decisions
Analyzing how the changing supply and
demand factors will impact price
Basing outlook on economic principles,
statistical analysis, and market knowledge
Econ 338C, Spring 2009
Market Outlook
Outlook depends on timing
Immediate: within a day or a week
Short term: few weeks to few months
Long term: next growing season to multiple
years
Different information needed for each type
Econ 338C, Spring 2009
Immediate
Term
Outlook
4.90
$ per bushel
4.80
4.70
4.60
4.50
Market timing
Any scheduled market movers
(USDA reports, etc.)
4.40
3/
30
/
20
3/
31 09
/2
00
4/
1/ 9
20
4/ 09
2/
20
4/ 09
3/
20
4/ 09
4/
20
4/ 09
5/
20
4/ 09
6/
20
4/ 09
7/
20
4/ 09
8/
20
4/ 09
9/
2
4/ 00
10 9
/2
00
9
4.30
Econ 338C, Spring 2009
Example: CBOT July 2010 Corn Futures
Short Term Outlook
6.00
Prices are adjusting to balance demand
with available supplies
$ per bushel
5.50
5.00
One reason to need short term outlook:
Storage decisions
4.50
4.00
Econ 338C, Spring 2009
20
/2
00
9
09
7/
7/
6/
20
22
/2
00
9
09
6/
9
6/
8/
20
25
/2
00
9
5/
11
/2
00
9
5/
4/
27
/2
00
9
00
/2
13
4/
3/
30
/2
00
9
3.50
Example: CBOT July 2010 Corn Futures
7.00
6.50
$ per bushel
6.00
Long Term Outlook
Buyers and sellers have time to adjust to
changes in prices and quantities.
5.50
5.00
Important for investment decisions
and government policy setting
4.50
4.00
3.50
3.00
2.50
Econ 338C, Spring 2009
6/30/2010
5/30/2010
4/30/2010
3/30/2010
2/28/2010
1/30/2010
12/30/2009
11/30/2009
10/30/2009
9/30/2009
8/30/2009
7/30/2009
6/30/2009
5/30/2009
4/30/2009
3/30/2009
2.00
Example: CBOT July 2010 Corn Futures
Sources of Outlook Information
Private sector market analysis firms
For-profit companies that sell services
Often more short-term focused
May be associated with a trading company
In-house analysis
Outlook for the company with own staff
ADM, Cargill, etc.
But your local elevator may offer analysis as
well
Econ 338C, Spring 2009
Sources of Outlook Information
 Land grant universities
 Long term
 Example: Food and Agricultural Policy Research Institute
(FAPRI)
 Intermediate to short term
 Examples: Iowa Farm Outlook (Grain, Livestock, Dairy),
Farmdoc.com, Livestock Market Information Center
 Often affiliated with university extension services
 Commodity organizations
 Typically narrowly focused on commodity
 May miss breath of outlook
Econ 338C, Spring 2009
Sources of Outlook Information
USDA Data and Analysis Sources
National Agricultural Statistical Service (NASS)
Production, consumption, and survey statistics
Agricultural Marketing Service (AMS)
Summaries of local market prices
Economic Research Service (ERS)
Analysis of agricultural markets and government
policies
Foreign Agricultural Service (FAS)
Trade information and analysis
Econ 338C, Spring 2009
Examples of Outlook Information
 World Agricultural Supply and Demand
Estimates report
 http://www.usda.gov/oce/commodity/wasde/latest.pdf
 Iowa Farm Outlook
 http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/
 FAPRI Outlook
 http://www.fapri.missouri.edu/outreach/publications/2009/FAPRI
_MU_Report_01_09.pdf
 http://www.fapri.iastate.edu/brfbk09/BrfBk2009.pdf
Econ 338C, Spring 2009
U.S. Corn Supply and Use
2007
2008
2009
93.5
86.0
85.0
Area Planted
(mil. acres)
Yield
(bu./acre)
150.7
153.9
Production
(mil. bu.)
13,038
12,101
Beg. Stocks
(mil. bu.)
1,304
1,624
Imports
(mil. bu.)
20
15
Total Supply
(mil. bu.)
14,362
13,740
Feed & Residual
(mil. bu.)
5,938
5,350
Ethanol
(mil. bu.)
3,026
3,700
Food, Seed, & Other
(mil. bu.)
1,337
1,290
Exports
(mil. bu.)
2,436
1,700
Total Use
(mil. bu.)
12,737
12,040
Ending Stocks
(mil. bu.)
1,624
1,700
Season-Average Price
($/bu.)
4.20
4.20
Source: USDA, WASDE and NASS
Econ 338C, Spring 2009
Iowa Farm Outlook
Monthly outlook from ISU Extension
Other universities offer similar services
Econ 338C, Spring 2009
FAPRI Reports
U.S. Corn Utilization
World Soybean Production
Source: FAPRI, 2009
Econ 338C, Spring 2009
Evaluating Source of Information
Know the source of data and analysis
Understand the motivation of the source
Public institution
Private analysis, for sale
Private analysis, confidential
What are the resources and track record
Econ 338C, Spring 2009
Outlook Issues
Efficient market hypothesis
All available information is quickly factored
into the markets and embedded in the price
New information and/or changes in supply
and demand after the outlook alter
outcomes
Participants react to forecasts
Econ 338C, Spring 2009
Seasonal Patterns
A price pattern that repeats itself with some
degree of accuracy year after year.
Supplies and demand
Often sound reasons
Widely known
Linked to storage cost or basis patterns in
grains
Linked to conception and gestation in livestock
Econ 338C, Spring 2009
1.06
Seasonal Pricing Patterns
1.04
1.02
1.00
0.98
0.96
0.94
Jan Feb Mar Apr May Jun
Corn
Econ 338C, Spring 2009
Jul
Aug Sept Oct Nov Dec
Soy
Source: USDA, NASS,
Monthly Price Data 1980-2008
Charting
Channel lines
Econ 338C, Spring 2009
Sell Signal
A sell signal is one close
below the charting lines
Sell signal
Econ 338C, Spring 2009
Buy Signal
Some chartists need only one close above the charting
line to create a buy signal, others use two closes above.
Buy signal
Econ 338C, Spring 2009
Key Reversal
A key reversal is when the daily high and low price range
exceed the price range for the previous two days.
Econ 338C, Spring 2009
Gaps
Gaps often occur when a major new piece of information hits
the market. They are often filled in by later price movements.
Econ 338C, Spring 2009
Double Tops & Bottoms
Double tops and bottoms show prices with major technical
resistance. These can be several days apart.
Econ 338C, Spring 2009
Head & Shoulders
Econ 338C, Spring 2009
Source: Figure 7, Charting Commodity Futures
Ag Decision Maker, File A2-20
Moving Averages
9 day average
18 day average
40 day average
Sell signal
Buy signals
Econ 338C, Spring 2009
Relative Strength Index
Looks at last X days worth of closing prices
X = 9, 14, 30, etc.
Summarizes upward and downward price
movements during the period
Record the last 14 days worth of price changes,
based on closing prices
Sum the positive and negative price changes
and create average for each
Relative Strength Index =
(Up average/(Up average + Down average))*100
Econ 338C, Spring 2009
Relative Strength Index
RSI for July 2010 Corn
Date
3/16/2009
3/17/2009
3/18/2009
3/19/2009
3/20/2009
3/23/2009
3/24/2009
3/25/2009
3/26/2009
3/27/2009
3/30/2009
3/31/2009
4/1/2009
4/2/2009
4/3/2009
Prices
Price Change
4.4475
4.4425
-0.005
4.4225
-0.02
4.51
0.0875
4.5075
-0.0025
4.5
-0.0075
4.4825
-0.0175
4.4125
-0.07
4.47
0.0575
4.445
-0.025
4.43
-0.015
4.6075
0.1775
4.52
-0.0875
4.585
0.065
4.6
0.015
Averages
RSI
Econ 338C, Spring 2009
Up
Down
0
0
0.0875
0
0
0
0
0.0575
0
0
0.1775
0
0.065
0.015
0.005
0.02
0
0.0025
0.0075
0.0175
0.07
0
0.025
0.015
0
0.0875
0
0
0.02875
0.017857
62
Relative Strength Index
RSI’s above 70 (80) are considered signals of a market due to
decline
RSI’s below 30 (20) are considered signals of a market due to
rally
Econ 338C, Spring 2009
Does Technical Analysis Work?
Arguments for it:
Real world markets are not perfectly rational
Markets may be slow to respond to new information
Technical analysis works with the psychological biases
It works because so many people use it
Self-fulfilling
Arguments against:
Efficient market hypothesis
The current price holds all of the relevant information
Econ 338C, Spring 2009
Convergence Issues
Typically, as futures contracts reach maturity, futures
price and cash prices at delivery points tend to
converge to the same level.
For several grain and oilseed futures contracts over
the last few years, this has not occurred.
“Poor Convergence Performance of CBOT Corn,
Soybean and Wheat Futures Contracts: Causes
and Solutions”
Scott Irwin, Philip Garcia, Darrel Good, and Eugene Kunda
University of Illinois, March 2009
Econ 338C, Spring 2009
Corn (Lack of) Convergence
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Soybean (Lack of) Convergence
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Wheat (Lack of) Convergence
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Why Is Convergence An Issue?
1. Non-convergence indicates the market is out-ofbalance.
“When a contract is out of balance the disadvantaged side
ceases trading and the contract disappears.”
(Hieronymus, 1977)
2. Non-convergence adds to the uncertainty in basis
and limits hedging effectiveness.
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Factors
 The relationship between the spread between
futures contracts and the cost of carry (think
storage costs)
 In the settlement process for corn and soybean futures,
the delivery instrument is a shipping certificate.
 If it is advantageous to the holder of a shipping
certificate, they can delay delivery and effectively store
the grain, paying CBOT set storage costs.
 Structural issues related to the delivery process
 Does the general trade flow of the commodity line up
with the possible delivery points under the futures
contract?
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Spread vs. Carry
Look at the ratio of the futures spread versus the cost of carry
Futures PriceNext – Futures PriceNearby
Storage Costs + Interest
Irwin, et al. found lack of convergence when ratio is high
(> 80%)
A lower ratio implies smaller returns to holding a shipping
certificate and more offsetting positions are taken, lowering
futures prices.
If the commodity is still in storage, then cash sales aren’t
happening, lowering cash prices.
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Delivery Points
How much of the commodity is
moving through the delivery point
areas?
Corn
Econ 338C, Spring 2009
Soybeans
Wheat
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Convergence vs. Carry - Corn
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Convergence vs. Carry - Soy
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Possible Reasons for High Ratios
1. CBOT storage rates below commercial storage rates
2. Large “long-only” index funds rolling to the next contract at
the same time
3. Large risk premiums built into futures to cover uncertainty
Irwin, et al. found support for #1 and arguments for #3, but
did not find support for #2.
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Possible Remedies
1. Increase CBOT storage rates
 Done for corn and soybeans in late 2008
2. Change delivery points to include more of the commodity
shipping area
 Mostly an issue for wheat
Other proposals:
 Move to cash settlement
 Force delivery
 Limit the number of certificates that can be held
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Relative Basis Change - Corn
The closer this
is to one, the
more effective
hedging is.
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Relative Basis Change - Soy
The closer this
is to one, the
more effective
hedging is.
Econ 338C, Spring 2009
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Class web site:
http://www.econ.iastate.edu/classes/econ338C/Hart/
See you next week!
Econ 338C, Spring 2009