Commodity Marketing Activity

Chapter One

Marketing History

• Chicago 1840’s - merchants buy corn from farmers

• 1850’s - merchants buy corn on time contracts (forward contracts) to be delivered at a later date to minimize risk

• Speculators appeared, buying and selling forward contracts, not intending to take delivery of the corn, but make a profit

Marketing History

• Forward Contracts were traded on street curbs and in public squares

• 1850’s Chicago merchants began trading forward contracts for wheat for eastern millers and exporters

• Board of Trade in Chicago had been established in 1848 to promote commerce

Marketing History

• 1859 State of Illinois authorized Board to establish quality standards, measure, gauge, weigh, and inspect grain

• Trading moved from the street to the Board of Trade

• At first, very disorganized: people disappeared before delivery, others couldn’t pay

Marketing History• 1865 Board required a “Margin”,

standardized contract terms for quantity, quality, delivery procedures, and payment terms

• These standardized agreements were called Futures Contracts

• Grain Exchanges formed in Minneapolis, Duluth, Milwaukee, Omaha, Kansas City, St. Louis, Toledo, Baltimore, San Francisco, New York

Marketing History

• Chicago Mercantile Exchange in 1874 (Chicago Produce Exchange) for butter, eggs, poultry, and other farm products

• Exchanges continue to evolve as need arises

• Durum Futures contracts in Minneapolis

Marketing History

• 1922 Grain Futures Act - regulate trading• 1936 Commodity Exchange Act made it

illegal to “fix prices”• 1974 Commodity Futures Trading Act est. the

Commodity Futures Trading Commission as the independent federal body that oversees all futures trading in U.S.

• Exchanges today page 5

The Participants• Commodity Exchange: place to trade, rules

• Clearing House: day-to-day settlement of all accounts, guarantees all contracts

• Brokerage House: places orders for contracts for businesses or individuals (commission)

• Traders: buys & sells contracts on the exchange floor in open outcry

Traders• Private Speculator: try to make money

buying & selling– Day Trader: close their position before the end

of the trading day– Position Trader: take relatively large positions

in market and hold their position for a long time

• Floor Broker: agent for customers

• Hedger: use futures to offset risk of changing prices in the cash market. Transfer risk to speculators

Marketing Choices• Cash Sales: deliver your crop to elevator etc.

• Forward Contract: negotiate now for delivery later

• Futures Contract: agreement to buy or sell at a date in the future

• Hedging: minimize risk in cash market

• Options on Futures Contracts: right, but not the obligation to buy or sell a futures contract at a specified price

Hedging

• You have wheat

• You sell wheat futures contract

• If prices fall, you sell your wheat at the lower price, but realize a gain in the futures market

• If prices rise, works the opposite way

• Price is lock in

Cash Markets• Basis: Cash Price - Futures Price

• Ex: $2.40 - $2.60 = -$.20 or 20 cents under

• Ex: $2.55 - $2.54 = $.01 or 1 cent over

• Deferred Pricing Agreement: deliver commodity, agree to set a price later

• Basis Contract: type of Forward Contract, lock in a basis relating to a specified futures contract.– Ex: basis -$.20 Cash = $2.64 at selling time– you will get $2.44