Junior and Senior level Ag Bus.
Colorado Agribusiness Curriculum
Section:
Advanced Agribusiness
Unit:
Marketing
Lesson Title:
The futures market
Colorado Ag
Education
Standards and
Competencies
Colorado Model
Content
Standard(s):
AGB11/12.04 - The student will understand the
influences of agricultural economy and its influences
on the overall economy.
AGB11/12.04.13 - Understand the futures market.
English Standard 1: Students read and understand a variety of materials
English Standard 4: Students apply thinking skills to their reading, writing,
speaking, listening, and viewing
English Standard 5: Students read to locate, select, and make use of relevant
information from a variety of media, reference, and technological sources.
Student Learning
Objectives:




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
Student will be able to (SWBAT) define the futures market and its functions
and understand the functions of the futures exchange.
SWBAT define a futures contract and understand its standardized terms
and how it is traded.
SWBAT describe the different futures market participants.
SWBAT understand the clearing house and margins.
SWBAT describe the difference between short and long contracts.
SWBAT describe carrying charges.
Time:
One 50 Minute Class
Resource(s):
Marketing Grain & Livestock, 2nd Edition, by Gary F. Stasko, Iowa State University
Press, ISBN 0-8138-2957-7
www.cbot.com
www.cme.com
Strategies for Great Teaching, by Mark Reardon and Seth Derner, ISBN 1-56976178-7
Instructions, Tools,
Equipment, and
Supplies:
Italicized words are instructions to the teacher; normal style text is suggested script.
Unit 5, Lesson 5: Futures Market 1
Computer
Projector
Copies of worksheet and Quizzes
Paper
Pencils
Lesson Plan
Interest Approach:
Objective 1:
Objective 2:
How many of you have ever heard of the Chicago Board of Trade or the Chicago
Mercantile? What do these entities do? Why were they created? Give students a
chance to browse www.cbot.com (Chicago Board of Trade) or www.CME.com
(Chicago Mercantile exchange) take the next five minutes to look at the Chicago
Board of Trade and/or the Chicago Mercantile Exchange and note the things that
you find interesting or questions that you have. After five minutes: Ok please
return to your seats. Is there anyone that would like to share his or her notes about
the two stock markets? Catch these notes on the board to be answered through
out this lesson. Excellent job!! Thank you every one that shared. We will answer
these questions and investigate these observations through out the lesson today.
Define the futures market and its functions and understand the functions of the
futures exchange.
 Defined: The process of trading futures contracts and operating the
facilitates that market many Ag products.
 Functions of the futures market.
o Provide an efficient and effective mechanism for the management
of price risk.
o Provide and efficient mechanism for price discovery.
o Provide a source of information for decision making.
o Provide a means for firms to secure additional operating capital.
 Purpose of Futures Exchanges.
o To bring together in a central place a large number of buyers and
sellers.
o To establish and enforce trading rules and standards.
o To settle disputes.
o To collect and disseminate marketing information to the public.
Define a futures contract and understand its standardized terms.
 Futures contracts Defined:
o A legally binding commitment to make or take delivery of a
standardized quantity and quality of a commodity at a
predetermined place and time in the future, for a price determined
by auction in the trading pit of an exchange.
o Price is determined by open outcry. The benefit to determine price
by open outcry is that it is competitive price discovery.
o There are two ways that a futures contract can be settled. Either
by delivery or by offsetting. Less than 1% of all contracts traded
are delivered on. Offsetting means to do the opposite of what you
had previously done. If you had previously bought a contract, you
sell it back. If you had sold one, then you buy it back.
 Standardized Terms of Futures Contracts.
o All terms for a futures contract are standardized, EXCEPT the
price. The price again is found by open outcry in the trading pit.
The standardized terms include the following:
 Delivery month – month of contracts. For example:
Unit 5, Lesson 5: Futures Market 2
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


Objective 3:
Objective 4:
March, May, July, September, December.
Contract Size – Unit size of the contracts. For Example:
Grains are 5000bu; Feeder cattle are 50000lbs and live
cattle (fat Cattle) are 40000lbs.
Place of Delivery – if delivered on the par delivery point.
Minimum Price fluctuations – minimum movement in the
price – for example: ¼ cent in grains.
Maximum Daily Price Move – Maximum it can move in one
day – for example 30 cents in wheat.
Think, Pair, Share
Break students into groups of two and have them decide who is number one and
who is number two. Then when you say go the number two students will listen
while the number one person has one minute to talk about the first two objectives.
Then have them switch roles and repeat.
 Describe the different futures market participants.
 Market Participants
o There is a difference between traders and brokers.
 Traders buy and sell contracts for him or her self – does
not take customer orders.
 Brokers take customers orders; may trade for him or her
self, but first responsibility is his customers.
o We can classify the people who are the futures market participants
into several different categories. The general public that trades
would be in the last two categories: Either public speculators or
hedgers.
 Floor brokers: Fill orders for outside speculators and
hedgers.
 Professional Speculators: trade for own accounts.
 Scalpers – buys and sells minute by minute.
 Pit traders – take larger positions and hold for longer, but
usually not overnight.
 Floor traders – take large positions and hold for several
days.
 Hedgers: Producers or users of commodities who seek
protection against adverse price changes by taking a
futures position opposite to cash position.
 Public speculators: Place orders with brokers to profit from
anticipated price changes. Not necessarily interested in
owning the commodity, but only in profiting off movements
in the price.
Understand the clearinghouse and margins.
 Clearing House
o Assumes the opposite side of every trade so that all connections
between buyers and sellers are served.
o Because the number of buys = number of sells, the clearing house
has no net position.
 Margins
o To trade you must have an account.
o With every new trade, traders must deposit money called margin.
o Margins serves as a deposit.
o Initial margin: Initial deposit paid.
o Maintenance Margin: Minimum amount of money that must be
kept in accounts.
 Margins are NOT a COST for trading futures. Your margin
money is a deposit in your account and if your trade is not
Unit 5, Lesson 5: Futures Market 3
a losing trade, you will still have your margin money.
The clearing house “marks-to-market” all open positions at
the end of a day to adjust all accounts.
o Margin Call – when the equity in the traders account falls below the
maintenance margin level
 Must then deposit enough funds to bring the equity in the
account back to the initial margin level.
Describe the difference between short and long positions.
 The term to sell is also known as a short position. To be short means that
you are trying to protect the commodity in your possession from falling
prices. Producers are generally sellers of short position holders.
 The term to buy is also known as a long position. To be long means that
you are trying to protect the purchase price of a commodity that you plan
on obtaining from rising prices. Mills, Factories, and packers would be long
position holders.
o Short = Sell = Protect from falling prices = producer
o Long = Buy = protect from increasing prices = Mills, factories,
packers.
 Simple rule = Buy Low and Sell High in either order.
Describe carrying charges:
 Carrying Charge = the difference in the prices from one futures contract to
another.
o Normal Market = is nearby price is lower than the distant contract
price – so prices increase into the future. It reflects the cost of
storage. For example, if the nearby month is Dec and the Dec
price is 2.32 and the March price 2.39 and the May price is 2.44
and the July Price is 2.48 and the Sept price is 2.57 then the
market is normal.
 Is common when supplies are large.
 Tells the trader what the market will pay for storage.
 Futures price spreads rarely reflect full carrying charge.
o Inverted Market = nearby prices are higher than distant contract
prices – So prices decrease into the future. It reflects a negative
price of storage. In other words, we are in short demand of the
product so the market price is telling you that they will pay a
premium if the product is delivered now – do not store the product
until later. For example, if Dec is the nearby month again, but this
time the Dec price is 2.32, the March price is 2.28, the May price is
2.20, the July price is 2.16, and the Sept price is 2.10, now the
market is inverted.
 Usually prevails when supplies are small.
 Market says they will pay a premium if you deliver now.
 Reflects negative price of storage.

Objective 5:
Objective 6:
Review/Summary:
Now You Should Be Able To:
1. Define the futures market and its functions and understand the functions of
the futures exchange.
2. Define a futures contract and understand its standardized terms.
3. Describe the different futures market participants.
4. Understand the clearing house and margins.
5. Describe the difference between short and long contracts.
6. Describe carrying charges.
Unit 5, Lesson 5: Futures Market 4
Application-Extended
Classroom Activity:
Have students look at www.cbot.com and find the standardized terms for certain
commodities and present them to the class.
Application--FFA
Activity:
Have students start on commodity challenge.
Application--SAE
Activity:
Have students find the standardized terms for their SAE production and follow the
market for a commodity of SAE production.
Evaluation:
PowerPoint worksheet
Quiz
1. Define the futures market.
2. What are the four main functions of a futures market?
3. What are the four main functions of a futures exchange?
4. What is a futures contract?
5. Price is determined by _______________
6. What is open Out Cry?
7. What are the two ways a futures contract can be settled?
8. What are the five standardized terms of a futures contract?
9. Who are the participants in the Futures Market?
10. What is a clearinghouse?
11. What is the purpose of the clearinghouse?
12. What is a Margin?
13. What is a Maintenance Margin?
14. What is a Short Position?
15. Who is most likely to take a Short Position?
16. What is a Long Position?
17. Who is most likely to take a Long Position?
Unit 5, Lesson 5: Futures Market 5
18. What is a Normal Market and give an example of a Normal Market?
19. What is an Inverted Market and give an example of such a market
20. What is the simple rule to follow when making trades on the futures market?
Evaluation Answer
Key:
See PowerPoint for work sheet answers.
Quiz
1. The futures market is defined as market trading futures contracts and
operating the facilitate the marketing of many Ag products
2. The four main functions of a futures market are:




Provide an efficient and effective mechanism for the
management of price risk.
Provide and efficient mechanism for price discovery.
Provide a source of information for decision making.
Provide a means for firms to secure additional operating capital.
3. The four main functions of a futures exchange:




To bring together in a central place a large number of buyers
and sellers.
To establish and enforce trading rules and standards.
To settle disputes.
To collect and disseminate marketing information to the public.
4. A futures contract is a legally binding commitment to make or take
delivery of a standardized quantity and quality of a commodity at a
predetermined place and time in the future, for a price determined by
auction in the trading pit of an exchange.
5. Price is determined by Open Outcry.
6. Open Outcry is the price determination by shouting bids for commodities in
a trading pit.
7. The two ways a futures contract can be settled are delivery and offset.
8. The five standardized terms of a futures contract are:





Delivery Month – month of contracts. For example:
March, May, July, September, December.
Contract Size – Unit size of the contracts. For Example:
Grains are 5000bu; Feeder cattle are 50000lbs and live
cattle (fat Cattle) are 40000lbs.
Place of Delivery – if delivered on the par delivery point.
Minimum Price fluctuations – minimum movement in the
price – for example: ¼ cent in grains.
Maximum Daily Price Move – Maximum it can move in one
day – for example 30 cents in wheat.
9. The participants in the Futures Market are Traders, Brokers, Floor
Brokers, Professional Speculators, Scalpers, Pit traders, Floor Traders,
Unit 5, Lesson 5: Futures Market 6
Hedgers, and Public Speculators.
10. A clearinghouse is an entity that insures that the number of buyers = the
number of sellers.
11. The purpose of the clearinghouse is to assume the opposite side of every
trade so that all connections between buyers and sellers are served.
12. A margin is the amount of money that a trader deposit in an account.
13. A Maintenance Margin is minimum amount of money that must be kept in
accounts.
14. A Short Position means that you are trying to protect the commodity in
your possession from falling prices by selling first.
15. Producers are most likely to take a short position.
16. A Long Position means that you are trying to protect the purchase price of
a commodity that you plan on obtaining from rising prices.
17. Mills, factories, and packers are most likely to take a long position.
18. A Normal Market is when nearby prices are lower than the distant contract
price – so prices increase into the future. For example, if the nearby
month is Dec and the Dec price is 2.32 and the March price 2.39 and the
May price is 2.44 and the July Price is 2.48 and the Sept price is 2.57 then
the market is normal.
19. An Inverted Market is when nearby prices are higher than distant contract
prices – So prices decrease into the future. For example, if Dec is the
nearby month again, but this time the Dec price is 2.32, the March price is
2.28, the May price is 2.20, the July price is 2.16, and the Sept price is
2.10, now the market is inverted.
20. The simple rule is to buy low an sell high in either order.
Unit 5, Lesson 5: Futures Market 7