Econ 339X, Spring 2011 ECON 339X: Agricultural Marketing Chad Hart Assistant Professor 515-294-9911…
ECON 339X: Agricultural Marketing
-
Upload
samantha-cook -
Category
Documents
-
view
33 -
download
0
description
Transcript of ECON 339X: Agricultural Marketing
Econ 339X, Spring 2010
ECON 339X:Agricultural Marketing
Chad HartAssistant Professor/Grain Markets Specialist
Econ 339X, Spring 2010
Today’s Topic
World Ag. Supply and Demand Update
Price Issues
Econ 339X, Spring 2010
U.S. Corn Supply and Use
Source: USDA, with my modificationsfor 2010 acreage
2007 2008 2009 2010
Area Planted (mil. acres) 93.5 86.0 86.5 88.8
Yield (bu./acre) 150.7 153.9 164.9 160.9
Production (mil. bu.) 13,038 12,092 13,131 13,131
Beg. Stocks (mil. bu.) 1,304 1,624 1,673 1,899
Imports (mil. bu.) 20 14 10 15
Total Supply (mil. bu.) 14,362 13,729 14,814 15,045
Feed & Residual (mil. bu.) 5,913 5,246 5,450 5,350
Ethanol (mil. bu.) 3,049 3,677 4,300 4,500
Food, Seed, & Other (mil. bu.) 1,338 1,276 1,265 1,290
Exports (mil. bu.) 2,437 1,858 1,900 2,100
Total Use (mil. bu.) 12,737 12,056 12,915 13,240
Ending Stocks (mil. bu.) 1,624 1,673 1,899 1,805
Season-Average Price ($/bu.) 4.20 4.06 3.60 3.60
Econ 339X, Spring 2010
World Corn Production
Source: USDA
Econ 339X, Spring 2010
U.S. Soybean Supply and Use2007 2008 2009 2010
Area Planted (mil. acres) 64.7 75.7 77.5 78.1
Yield (bu./acre) 41.7 39.7 44.0 42.9
Production (mil. bu.) 2,677 2,967 3,359 3,307
Beg. Stocks (mil. bu.) 574 205 138 190
Imports (mil. bu.) 10 13 15 8
Total Supply (mil. bu.) 3,261 3,185 3,512 3,505
Crush (mil. bu.) 1,803 1,662 1,730 1,655
Seed & Residual (mil. bu.) 93 101 148 168
Exports (mil. bu.) 1,159 1,283 1,445 1,325
Total Use (mil. bu.) 3,056 3,047 3,322 3,147
Ending Stocks (mil. bu.) 205 138 190 358
Season-Average Price ($/bu.) 10.10 9.97 9.45 8.80
Source: USDA, with my modificationsfor 2010 acreage
Econ 339X, Spring 2010
World Soybean Production
Source: USDA
Econ 339X, Spring 2010
Seasonal PatternsA price pattern that repeats itself with some
degree of accuracy year after year.Supplies and demandOften sound reasonsWidely knownLinked to storage cost or basis patterns in
grainsLinked to conception and gestation in livestock
Econ 339X, Spring 2010
Seasonal Pricing Patterns
0.94
0.96
0.98
1.00
1.02
1.04
1.06
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Corn Soy
Source: USDA, NASS,Monthly Price Data 1980-2008
Econ 339X, Spring 2010
Charting
Channel lines
Econ 339X, Spring 2010
Sell Signal
Sell signal
A sell signal is one close below the charting lines
Econ 339X, Spring 2010
Buy Signal
Buy signal
Some chartists need only one close above the charting line to create a buy signal, others use two closes above.
Econ 339X, Spring 2010
Key Reversal
A key reversal is when the daily high and low price range exceed the price range for the previous two days.
Econ 339X, Spring 2010
Gaps
Gaps often occur when a major new piece of information hits the market. They are often filled in by later price movements.
Econ 339X, Spring 2010
Double Tops & Bottoms
Double tops and bottoms show prices with major technical resistance. These can be several days apart.
Econ 339X, Spring 2010
Head & Shoulders
Source: Figure 7, Charting Commodity FuturesAg Decision Maker, File A2-20
Econ 339X, Spring 2010
Moving Averages9 day average18 day average40 day averageSell signal
Buy signals
Econ 339X, Spring 2010
Relative Strength IndexLooks at last X days worth of closing prices
X = 9, 14, 30, etc.Summarizes upward and downward price movements during the period
Record the last 14 days worth of price changes, based on closing pricesSum the positive and negative price changes and create average for eachRelative Strength Index = (Up average/(Up average + Down average))*100
Econ 339X, Spring 2010
Relative Strength Index
Date Prices Price Change Up Down3/16/2009 4.44753/17/2009 4.4425 -0.005 0 0.0053/18/2009 4.4225 -0.02 0 0.023/19/2009 4.51 0.0875 0.0875 03/20/2009 4.5075 -0.0025 0 0.00253/23/2009 4.5 -0.0075 0 0.00753/24/2009 4.4825 -0.0175 0 0.01753/25/2009 4.4125 -0.07 0 0.073/26/2009 4.47 0.0575 0.0575 03/27/2009 4.445 -0.025 0 0.0253/30/2009 4.43 -0.015 0 0.0153/31/2009 4.6075 0.1775 0.1775 04/1/2009 4.52 -0.0875 0 0.08754/2/2009 4.585 0.065 0.065 04/3/2009 4.6 0.015 0.015 0
Averages 0.02875 0.017857
RSI 62
RSI for July 2010 Corn
Econ 339X, Spring 2010
Relative Strength Index
RSI’s above 70 (80) are considered signals of a market due to declineRSI’s below 30 (20) are considered signals of a market due to rally
Econ 339X, Spring 2010
Does Technical Analysis Work?
Arguments for it:Real world markets are not perfectly rationalMarkets may be slow to respond to new informationTechnical analysis works with the psychological biasesIt works because so many people use it
Self-fulfilling
Arguments against:Efficient market hypothesis
The current price holds all of the relevant information
Econ 339X, Spring 2010
Convergence IssuesTypically, as futures contracts reach maturity, futures price and cash prices at delivery points tend to converge to the same level.
For several grain and oilseed futures contracts over the last few years, this has not occurred.
“Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions”Scott Irwin, Philip Garcia, Darrel Good, and Eugene KundaUniversity of Illinois, March 2009
Econ 339X, Spring 2010
Corn (Lack of) Convergence
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Soybean (Lack of) Convergence
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Wheat (Lack of) Convergence
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Why Is Convergence An Issue?
1.Non-convergence indicates the market is out-of-balance.“When a contract is out of balance the disadvantaged side
ceases trading and the contract disappears.” (Hieronymus, 1977)
2.Non-convergence adds to the uncertainty in basis and limits hedging effectiveness.
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Factors The relationship between the spread between
futures contracts and the cost of carry (think storage costs) In the settlement process for corn and soybean futures,
the delivery instrument is a shipping certificate. If it is advantageous to the holder of a shipping
certificate, they can delay delivery and effectively store the grain, paying CBOT set storage costs.
Structural issues related to the delivery process Does the general trade flow of the commodity line up
with the possible delivery points under the futures contract?
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Spread vs. CarryLook at the ratio of the futures spread versus the cost of carry
Futures PriceNext – Futures PriceNearby
Storage Costs + Interest
Irwin, et al. found lack of convergence when ratio is high (> 80%)
A lower ratio implies smaller returns to holding a shipping certificate and more offsetting positions are taken, lowering futures prices.
If the commodity is still in storage, then cash sales aren’t happening, lowering cash prices.
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Delivery Points
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Corn Soybeans Wheat
How much of the commodity is moving through the delivery point areas?
Econ 339X, Spring 2010
Convergence vs. Carry - Corn
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Convergence vs. Carry - Soy
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Possible Reasons for High Ratios1. CBOT storage rates below commercial storage rates
2. Large “long-only” index funds rolling to the next contract at the same time
3. Large risk premiums built into futures to cover uncertainty
Irwin, et al. found support for #1 and arguments for #3, but did not find support for #2.
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Possible Remedies1. Increase CBOT storage rates
Done for corn and soybeans in late 2008
2. Change delivery points to include more of the commodity shipping area Mostly an issue for wheat
Other proposals: Move to cash settlement Force delivery Limit the number of certificates that can be held
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
Econ 339X, Spring 2010
Relative Basis Change - Corn
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
The closer this is to one, the more effective hedging is.
Econ 339X, Spring 2010
Relative Basis Change - Soy
Source: Irwin, Garcia, Good, and Kunda, 2009Marketing and Outlook Research Report 2009-02
The closer this is to one, the more effective hedging is.
Econ 339X, Spring 2010
Class web site:http://www.econ.iastate.edu/classes/econ339/hart-lawrence/