Post on 03-Jan-2016
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AGEC 420
• Markets• TradeSim rankings• Storage assignment due• Wed – Guest Speaker – Dr. Mintert• April 4 – White Commercial, 5pm, WA 328• Today –
– Currency hedge
– Soybean Comlex
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Open Position - MidAm Corn
• Bot 1 MidAm Dec Corn @ 2.29¼, March 6
Close $ +/-Fri., Mar 22 2.25 ½ -$40.00
http://www.cbot.com/cbot/charts/detail/0,1551,13+44+120+C+Z2+1+1,00.html
Cattle: http://futures.tradingcharts.com/chart/LC/42
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Currency Hedge
Scenario: US Meat company exporting to a Japanese
wholesaler.
Delivery and payment will be in June
US firm wants to get paid in $
Japanese firm wants to pay in Yen
--> someone will face currency risk
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Currency Hedge (cont.)
With payment in Yen, U.S. firm faces risk
March 25:Negotiated price is $50,000 at today’s exchange
rate (ER) of $0.80/100Y
=> payment of 6,250,000Y in June
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Currency Risk
In June, Yen may be worth less
at $0.75/100Y, 6.25mill Yen = $46,875
=> if the Yen drops, US company looses.
To hedge against this risk?
=> sell the yen futures contract for June
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The Soybean Complex
Soybeans: 5,000 bu. contract; Quoted as $/buMay @ 5164 $5.16½ /bu (min tick = ¼ c)
One bushel (60 lbs) of beans yields:– 11 lbs Soybean Oil: – 48 lbs Soybean Meal:
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Soybean Oil and Meal
Soybean Oil60,000 lb contractQuoted as c/lbMay @ 1623 16.23c/lb (min tick is .01c)
Soybean Meal100 ton contract [1 ton = 2000 lb]Quoted as $/tonMay @ 1682 $168.20/ton (min tick is 10c)
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Soybean Processor
Gross margin = Revenue - Costs
On a per bushel basis:
Revenue = Qoil*Poil + Qmeal* Pmeal
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Revenue from Oil & Meal
Oil Revenue Per Bushel of Beans= 11 lbs oil/bu * Poil/lb
Meal Revenue Per Bushel of Beans= 48 lbs meal/bu * Pmeal/ton / 2000 lbs/ton
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Gross Margin per Bushel
Revenue = Qoil*Poil + Qmeal* Pmeal
= 11* Poil + 48* Pmeal /2000
= 11* Poil + 48/2000* Pmeal
Cost = Pbeans
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Gross margin - example
Yesterdays prices for May contracts:• Soybeans -- $5.15 (screen quote is 5150)
• Soybean Oil -- 16.37 c/lb (quoted as 1637)
– oil revenue per bushel = 11*(16.37) = $1.80
• Soybean Meal -- 166.90 $/ton (quoted as 1669)
– meal revenue = 48/2000*(166.90) = $4.01
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Gross margin - example
• Total Revenue– $1.80 + $4.01 = $5.81
• Total Cost– $5.15
• Gross margin = $0.66
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Gross margin – May 1999
Using prices for May 1999 contracts:
• Soybeans = $4.99
• Soybean Oil -- 19.58 c/lb – oil revenue per bushel = 11*(19.58) = $2.15
• Soybean Meal -- 136.10 $/ton– meal revenue = 48/2000*(136.10) = $3.27
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Gross margin – May 1999
• Total Revenue– $2.15 + $3.27 = $5.42
• Total Cost– $4.99
• Gross margin = $0.43
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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”)
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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
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Crush Spread - example
Buy May beans @ $4.99; Sell May oil @ 19.58; Sell May meal at 136.10
Exercise: Setting basis = zero, find the actual margin if May prices are:
a) beans @ 5.23; oil @ 19.60; meal @ 137.00
b) beans @ 4.75; oil @ 19.56; meal @ 135.20
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Crush Spread
• How many contracts of each?
• If you use 1:1:1 of Beans:Oil:Meal, are you adequately covered?
• What is the correct ratio? – See handout on ‘Soybean Crush’ – on webpage