Ag marketing and Prices

How are hedger’s gains/losses taxed?

As ordinary business income.

How are speculator’s gains/losses taxed?

As capital gains/losses (capital assets).

What is hedging?

Taking an opposite position in futures from your present cash position

If you are long cash (own the commodity), what hedge do you take

Sell futures (short hedge).

If you are short cash (need the commodity), what hedge do you take?

Buy futures (long hedge).

Who uses a short hedge?

A seller of a commodity

How does a short hedge work?

Sell futures first → buy back when selling the commodity.

When does a short hedge benefit?

From a narrowing/strengthening basis.

Who uses a long hedge?

A buyer of a commodity.

How does a long hedge work?

Buy futures first → sell back when buying the commodity

When does a long hedge benefit?

From a widening/weakening basis.

Define basis.

Cash price – Futures price.

Expected hedge price formula?

Futures price ± Estimated local basis = Expected hedge price.

When is actual basis measured?

When the hedge is lifted (futures offset).

How can a seller improve their basis?

Basis moving wide → narrow, weak → strong, negative → less negative, negative → positive.

What does the basis thermometer show?

Strengthening/narrowing vs. weakening/widening.

Is basis or cash more predictable?

Basis is more predictable and less extreme.

Why do cash and futures move together?

Same supply and demand fundamentals.

What does the Law of One Price state?

If price difference > transportation cost, arbitrage occurs.

What ensures cash and futures converge at delivery?

Arbitrage.

Name factors that cause grain basis fluctuations.

S&D, protein supply, crop conditions, transportation, storage availability/cost, seasonality, locational differences.

Name factors that cause livestock basis fluctuations.

Location, transport costs, grade, average weight, dressing %, shrinkage.

What is a cash sale?

Sale of product at time of delivery.

Benefits of cash sales?

Simple, cash flow, no risk of weaker basis/falling prices.

Disadvantages of cash sales?

No benefit from rallies or basis improvements.

When to use cash sales?

When flat price is high and basis is strong, or basis is strong but price low (with paper hedge).

What is a cash forward contract?

Set price, payment, and delivery period.

Benefits of cash forward contracts?

Easy, widely available, lock in good price + basis.

Disadvantages of cash forward contracts?

Locked into delivery, no rally/basis gain, production risk.

When to use cash forward contracts?

When basis is good and flat price meets goals.

What is a short hedge?

Selling futures to set sales price for production.

Benefits of short hedges?

Eliminates price risk, can gain from basis, flexible entry/exit.

Disadvantages of short hedges?

Margin calls, basis risk, inflexible contract size.

When to use short hedge?

Price is good but basis wide or don’t want local cash delivery.

What is a basis contract?

Locks in basis but leaves price open (can get partial payment).

Benefits of basis contracts?

Capture strong basis, gain from futures rallies, some cash flow.

Disadvantages of basis contracts?

Locked delivery, price risk, no further basis gain.

When to use basis contract?

Strong basis, low flat price, futures expected to rise.

What is a HTA contract?

Lock in futures price now, set basis later.

Benefits of HTA contracts?

No futures price risk, no margin (usually), can gain from basis.

Disadvantages of HTA contracts?

Basis risk, transaction costs, delivery required, lose upside if futures rise

When to use HTA?

Futures price attractive, cash low due to weak basis.

What is a put option?

Right to sell futures at a set price, creating a price floor.

Benefits of puts?

No margin calls (premium only), keep upside, no delivery, avoids production risk.

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Disadvantages of puts?

Contract size limited, floor weaker if basis weakens, premium cost.

When to use puts?

Price meets goals but delivery/basis/production risk is concern.

What is marketing in ag?

Negotiating best deal for producer’s money, skills, labor, talent.

Marketing involves what flows?

Physical and economic flow from producer to consumer.

Marketing coordinates what?

Economic activities from producer to consumer.

Marketing provides what utilities?

Form, time, and place.

Define place utility.

Value from moving goods; cost = transport, assembly, dispersion

Define time utility.

Value from storing goods; cost = storage, interest, spoilage, price change

Define form utility.

Value from processing/packaging; cost = processing/packaging.

List the stages of the ag marketing chain.

Input suppliers → Farm supply → Processor → Wholesaler → Distributor → Retailer → Consumer demand.

Where does the marketing chain start and end?

Starts with input suppliers, ends with consumer demand.