AGEC 420 • • • • • Markets, TradeSim April 4 – White Commercial, 5pm, WA 328 Soybean Crush Fundamental analysis Quiz AGEC 420, Lec 27 1 Open Position - Corn • Bot 1 MidAm Dec Corn @ 2.29¼, March 6 Mon., Mar 28 Close ? $ +/- 2.24 ½ -$47.50 CBOT: http://www.cbot.com/ Cattle: http://futures.tradingcharts.com/chart/LC/42 AGEC 420, Lec 27 2 Soybean Processors risk Pbeans and/or Poil, Pmeal • Processor can lock in a margin by using a “spread hedge” (often called a “crush spread” or “putting on the crush”) AGEC 420, Lec 27 3 Putting on the Crush • The simultaneous purchase of soybean futures and sale of soybean meal and soybean oil futures • to lock in the processing margin AGEC 420, Lec 27 4 Crush Spread • If you use 1:1:1 of Beans:Oil:Meal, are you adequately covered? NO • What is the correct ratio? Beans Oil Meal 10 9 12 – See handout on ‘Soybean Crush’ – on webpage AGEC 420, Lec 27 5 The Crush Spread • Buy soybean futures and sell soybean meal and soybean oil futures – to lock in the processing margin • or – to bet on a reduction in margin (spec) • Reverse Crush: – A bet on a widening margin: (Sell beans, Buy products) AGEC 420, Lec 27 6 Soybeans US Production Area (m ha): Yield (MT/ha): Prod (MMT): Export (MMT): Av. P ($/MT): 1997/98 2001/02 27.9 2.62 73.2 23.7 230 29.5 2.66 78.6 27.7 153 [36.7 bu per MT] AGEC 420, Lec 27 7 Soybeans World Production 1997/98 United States 46% Brazil 20% Argentina 12% China 9% TOTAL (MMT) 158 AGEC 420, Lec 27 2001/02 43% 24% 15% 8% 184 8 Soybean Trade US Exports US Export (MMT): Exports/Prod %: % world exports: Importers: AGEC 420, Lec 27 1997/98 2001/02 23.7 32.3% 59% 27.7 35.3% 47% EU (35%), China (22%), Japan (8%) 9 Fundamental Analysis The use of information about supply, demand and other economic factors to forecast price. AGEC 420, Lec 27 10 Fundamental Analysis Typically involves: a) gathering info on supply and demand • USDA reports, weather, political factors, substitutes b) translating quantity information into a price prediction • regression analysis AGEC 420, Lec 27 11 Fundamental Analysis • Is it useful or worthwhile for the small hedger or speculator? Purcell, Chapters 3 --> YES Malkiel, Chapters 5 and 7 --> NO AGEC 420, Lec 27 12 Fundamental Analysis - Livestock Long run: use both Supply and Demand information Short run: use only Supply information Cattle on Feed numbers Weights AGEC 420, Lec 27 13 Technical Analysis The use of historical market information on prices, price patterns, volume of trade etc to forecast future price movement AGEC 420, Lec 27 14 Technical Analysis Typically involves use of: a) Charts - patterns b) Other mathematical constructs - moving averages, relative strength index AGEC 420, Lec 27 15 Technical Analysis Is it worthwhile? Purcell, Chapters 4 and 5 --> YES Malkiel, Chapters 5 and 6 --> NO Example: http://commoditytrader.net AGEC 420, Lec 27 16