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Commodity Marketing Quiz
DePutter Publishing Ltd.
How much do you really know about the markets? Are your risk management skills as sharp as
they should be? With this quiz, you’ll find out where you stand. Then you can focus your learning
efforts on any gaps or areas of confusion.
Part 1 – General Marketing Knowledge
1) If you think wheat prices are going higher, you are:
a) bearish
b) neutral
c) bullish
d) a speculator
e) far too optimistic
2) A farmer’s crop is still in the field and he has made no arrangements for its sale. His cash
market position is:
a) long
b) short
c) neither, since the crop hasn’t been harvested
d) neutral, because he has no position in the futures market
3) The premise that makes hedging possible is that cash prices and futures prices:
a) move in opposite directions
b) move upward and downward by identical amounts
c) generally move in similar directions by approximately similar amounts
d) are regulated by the exchanges which are in turn regulated by the government
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4) The feed buyer who wants to hedge against an increase in corn prices could:
a) purchase corn futures contracts
b) sell corn futures contracts
c) buy corn call options
d) None of the above are valid hedges
5) Given the importance of risk management in Canadian agriculture and the high return
potential of utilizing futures and options as part of a commodity marketing and trading
program, a high percentage of farmers should be encouraged to hedge with futures and
options regularly.
a) True
b) False
6) The buyer of a call option can:
a) exercise the option
b) sell the option
c) allow the option to expire
d) sit and watch the value of the option fall to zero
e) any of the above
7) Suppose it’s July 1. Weather forecasts for the US Midwest are hot and dry. The U.S.
government just released bullish acreage news for both corn and soybeans. Futures, which
were already heated up before the news, gapped even higher the morning after the USDA
report came out. But in the last few minutes of the day, spec funds started selling, pushing
prices near limit-down for the day. What’s a good marketing strategy?
a) It’s a judgment call, requiring at least several days for consideration and research. Check
to see what your trusted colleagues think. Make some calls to your broker and your grain
merchants, as they are better informed than spec funds. Consider a tour of the Midwest to
assess crop conditions first hand.
b) Give the market time to turn around. One day’s action means nothing. This is probably a
case of fund selling causing a brief interruption in a bullish trend. Hot, dry weather in
early July is usually bullish, especially for corn; sometimes the market is just slow to
respond.
c) Make a sale of some kind, such as 20% of old-crop and perhaps a bit of new-crop
production. Just do it and get it done. Prices may already be reflecting the bullish news.
Negative response to bullish news like this warrants quick action, involving at least small
sale, especially when prices are attractive and the news seems very bullish.
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d) Buy futures in an effort to maximize the upside potential in the market, ensuring that the
long futures positions will replace previous old-crop cash sales. You can minimize your
risk of loss by placing a sell-stop under the market.
e) Fix a basis contract. Futures are too wild to predict but usually weather markets like this
will result in basis premiums that should be captured quickly.
f) Pray for hot, dry weather in the U.S. and rain on your own farm.
Part 2 – Storage Knowledge
1. Suppose the March corn future is US$4, May is $3.90, July is $3.82 and Sept is $3.75/bu.
This market is:
a) An inverted market
b) Indicating expectations of lower prices later in the year
c) A carrying-charge market
d) A market displaying a built-in “carry.”
2. Suppose it is early January and local merchants are bidding $4/bu for immediate delivery,
$4.10 for delivery in February, $4.15 for delivery in March/April, and $4.20 for delivery in
May/June. The safest strategy for the person storing corn on-farm is to:
a) Sell for immediate delivery
b) Sell for later delivery for the higher prices
c) Wait – don’t sell - the higher deferred delivery prices are signaling higher prices later
d) Sell futures and stay open on the basis
e) Make a basis contract and stay open on futures
3. Suppose you own soybeans in your own storage facility. You expect futures prices to go up
but you think the Cdn $ will rise, thereby pressuring basis levels. What is a good strategy to
cope with this?
a) Buy futures and keep the soybeans in the bin
b) Hedge by selling soybean futures
c) Just sell the beans
d) Fix a basis contract and stay open on futures
e) Keep the beans in the bin and buy Cdn $ futures
Theoretically acceptable idea
4. Suppose it’s September and you have wheat stored in your bin. You’d like to sell it before
corn harvest, to free up storage space.
The markets are as follows: Dec wheat futures, $6.90, March wheat futures, US$7; May
$7.10. Local wheat price $7.70 for delivery now; $7.70 for delivery in Dec; $7.95 for
delivery in Jan-March, $8.05 for delivery in April.
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For corn, the Dec future is $4.50, March future, $4.45 and May $4.40. Local bids are $4.90
for Nov/Dec delivery, $4.90 for Jan/Feb; same for April/May.
What are the some options for your marketing strategy?
a) Sell the wheat now, because the price is very good. Store the corn – prices are not so
great in comparison to wheat
b) Store the wheat through harvest and plan to sell the corn off the combine
c) Store the wheat through harvest and forward contract the corn for Nov/Dec delivery
d) Sell the wheat for deferred delivery such as April, and also sell enough corn for harvest
delivery to reduce corn storage needs
e) Sell the wheat and hedge the corn by selling the May future, but stay open on corn basis
f) Fix basis on wheat so you can deliver it but stay open on futures
Note: d is best to capture the “carry” in the wheat market. Corn is inverted –best to sell some
for nearer-term delivery.
Part 3- Forward Pricing
1. A good time for growers to start forward contracting new-crop corn and soybean production
is usually mid-February.
a) True
b) False
c) It depends, because (give reasons) ___Usually Feb is weak time. If rallying sharply in
Feb (rare) then ok to sell._
2. It is usually better to hedge than forward contract, in case you can’t deliver the grain due to a
weather problem or change of mind.
a) True
b) False
d) It depends, because __hedging can complicate your life! But yes theoretically hedging
can often work better than forward contracts.
e)
3. Important considerations for forward contract decisions in spring and summer include:
a) Profitability of the price
b) Is your crop insured with floating rate price insurance?
c) Good, attractive basis
d) Outlook is clearly bearish for futures
e) Outlook is clearly bearish for futures and basis both
f) Forward contracting strongly advised by experts (grain merchants, brokers, etc.)
Note: Outlooks are not dependable but can be considered as part of the decision. Advice from
others should be considered but the decision is yours – it’s YOUR money and business.
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Part 4- Basis contracting
1. Suppose the soybean basis is attractive and you fix some beans on basis contracts. It is
January 15. The best basis is 75 cents over the March future. The March future is US$10.
Now suppose it is Feb 27. You still hold the basis contract. The elevator calls and says you
have to price out the basis contract by noon tomorrow, or roll it.
The March future is down to US$9.40, May is $9.50, July is $9.65.
With that in mind, answer the following questions:
a) Which month should you roll the basis contract over to? ____May_______
b) What will your basis be after the roll? _______65cents over______________
c) What will your price for the soybeans be if you roll to the May future, the day before you
roll, and immediately afterwards – assuming futures do not change? Same: $10.15
d) Are you better to just price out the basis contract and close the sale? What are some pros
and cons? __Maybe you are better to close it out. Always have a “stop” or “line in the
sand” under basis contracts!
12. Suppose you expect the local corn basis to decline, and at the same time the futures market
appears ready to move higher. Assuming your analysis is accurate, what marketing strategy
or strategies would work best for selling the corn you’re harvesting?
a)
b)
c)
d)
e)
Fix a basis contract
Sell the corn and replace the cash sale with long futures
Hold the corn unsold while hedging with short futures
Store the corn
Sell the corn and buy into the stock market
Interpreting your results
How’d you do? You can use your score to identify weak points or areas that need more attention.
For more resources and learning opportunities, check out deputter.ca.