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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