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Understanding the Grain Markets for Dummies | Grain Futures Made Simple | Daily Farm Brief · Farm Tales Unplugged - Daily Farm Brief

• 0:02
  SPEAKER_00: Good morning, Farm Nation, and Hello Truck City.
• 0:05
  SPEAKER_00: This is FarmTale's Unplugged Daily Farm Brief with a special weekend bonus edition brought to you by World TradeX, empowering farmers.
• 0:13
  SPEAKER_00: I'm Rick Fortanova.
• 0:15
  SPEAKER_00: Our daily show brings you farm news, current events, egg tech, markets, and a visit to the old farmer's almanac.
• 0:21
  SPEAKER_00: Today we're slowing down a little and spending the whole show on one subject: understanding the grain market.
• 0:27
  SPEAKER_00: We'll start with a farmer who has corn to sell and somebody who needs to buy it.
• 0:31
  SPEAKER_00: We'll follow their decisions one step at a time.
• 0:34
  SPEAKER_00: And if you enjoy this show, would you give us a follow, a like, or a share?
• 0:37
  SPEAKER_00: That would be fantastic.
• 0:39
  SPEAKER_00: So grab your coffee and fire up whatever you're driving, and let's learn about the grain market.
• 0:47
  SPEAKER_00: Why do we need a grain market?
• 0:49
  SPEAKER_00: Imagine a farmer named Sam.
• 0:51
  SPEAKER_00: He's our made-up farmer for the day, and all our prices are examples.
• 0:55
  SPEAKER_00: Sam grows corn.
• 0:56
  SPEAKER_00: A livestock farmer needs corn to feed her animals, an ethanol plant needs corn to make fuel.
• 1:01
  SPEAKER_00: They need to find a way to find each other and agree on a price.
• 1:04
  SPEAKER_00: That's what the market does.
• 1:06
  SPEAKER_00: A market can be people dealing directly with each other or buyers and sellers meeting through a computer system.
• 1:12
  SPEAKER_00: Suppose Sam has a load of corn and three buyers want it.
• 1:15
  SPEAKER_00: One buyer might offer a little more to get that load.
• 1:18
  SPEAKER_00: Now, suppose lots of farmers have corn to sell and the buyers already have nearly everything they need.
• 1:24
  SPEAKER_00: Those buyers may offer less.
• 1:26
  SPEAKER_00: The price comes from those offers and the deals people actually agree to.
• 1:30
  SPEAKER_00: Nobody at the exchange simply decides what every farmer's corn should be worth.
• 1:35
  SPEAKER_00: An exchange is an organized marketplace.
• 1:37
  SPEAKER_00: It provides the trading system and the rules.
• 1:40
  SPEAKER_00: So what makes prices go up and down?
• 1:42
  SPEAKER_00: You'll hear people talk about supply and demand.
• 1:45
  SPEAKER_00: Supply means how much corn is available.
• 1:47
  SPEAKER_00: Demand means how much corn buyers want and are willing to pay for.
• 1:50
  SPEAKER_00: If drought damages a large part of the crop, there may be less corn to go around.
• 1:55
  SPEAKER_00: Buyers competing for that smaller supply can push prices up.
• 1:58
  SPEAKER_00: If growing conditions are good and farmers harvest a huge crop, there may be more corn than buyers urgently need.
• 2:05
  SPEAKER_00: That can push prices down.
• 2:06
  SPEAKER_00: Buying can change too.
• 2:08
  SPEAKER_00: An ethanol plant might increase production and need more corn.
• 2:12
  SPEAKER_00: Livestock producers might need more feed.
• 2:14
  SPEAKER_00: Customers overseas might place bigger orders.
• 2:17
  SPEAKER_00: Those purchases can help support prices.
• 2:20
  SPEAKER_00: If customers buy less, prices can come under pressure.
• 2:23
  SPEAKER_00: And it's a worldwide business.
• 2:25
  SPEAKER_00: A big crop in another country gives buyers another place to shop.
• 2:28
  SPEAKER_00: People also act on what they think is about to happen.
• 2:32
  SPEAKER_00: A forecast for damaging heat can move prices before the heat arrives.
• 2:35
  SPEAKER_00: If rain later improves the outlook, prices may move back down.
• 2:40
  SPEAKER_00: That helps explain why prices can change while Sam's corn is still standing in the same field.
• 2:45
  SPEAKER_00: The market is responding to new information about how much grain people expect to have and need.
• 2:50
  SPEAKER_00: Now, this is why Sam needs to think ahead.
• 2:53
  SPEAKER_00: Sam plants in spring and expects to harvest in fall.
• 2:56
  SPEAKER_00: He pays for seed, fertilizer, and other expenses long before he sells the crop.
• 3:01
  SPEAKER_00: Suppose he figures that a selling price around$4.70 a bushel would work for his business.
• 3:06
  SPEAKER_00: A bushel is a unit for measuring grain.
• 3:08
  SPEAKER_00: Think of corn priced by the bushel the way gasoline is priced by the gallon.
• 3:12
  SPEAKER_00: Sam's worry is that by harvest the price might be much lower.
• 3:16
  SPEAKER_00: The livestock farmer has the opposite worry.
• 3:18
  SPEAKER_00: She needs corn later and she's concerned the price might rise.
• 3:21
  SPEAKER_00: Both want a way to make plans before the corn changes hands.
• 3:25
  SPEAKER_00: Futures contracts give them one way to manage that uncertainty.
• 3:28
  SPEAKER_00: So, what is a futures contract?
• 3:31
  SPEAKER_00: A contract is an agreement that carries obligations.
• 3:34
  SPEAKER_00: A corn futures contract is an agreement to buy or sell a set amount of corn for a specified delivery month at an agreed price today.
• 3:42
  SPEAKER_00: The exchange sets standard rules, including the amount of corn and the quality.
• 3:47
  SPEAKER_00: One standard corn contract covers 5,000 bushels.
• 3:50
  SPEAKER_00: For our example, Sam sells one December corn futures contract at$5 a bushel.
• 3:56
  SPEAKER_00: He is the seller side of that agreement.
• 3:58
  SPEAKER_00: Somebody else takes the buyer's side.
• 4:00
  SPEAKER_00: The word December identifies the contract's delivery month.
• 4:04
  SPEAKER_00: It does not mean$5 is a prediction guaranteed to come true in December.
• 4:08
  SPEAKER_00: It means$5 is the price agreed upon when Sam makes this trade.
• 4:13
  SPEAKER_00: And Sam does not receive payment for$5,000 bushels of corn that day.
• 4:17
  SPEAKER_00: He still has his crop.
• 4:18
  SPEAKER_00: The futures agreement is recorded in a separate trading account.
• 4:22
  SPEAKER_00: What does the delivery month mean?
• 4:24
  SPEAKER_00: Because this is a contract involving real corn, it has rules for completing a grain delivery.
• 4:30
  SPEAKER_00: If a seller keeps the contract into that process, the seller must be prepared to meet the exchange's delivery requirements.
• 4:36
  SPEAKER_00: A buyer who keeps the contract can be required to pay for and accept delivery under those same rules.
• 4:42
  SPEAKER_00: This is a formal process using approved grain facilities and documents giving the buyer rights to the grain.
• 4:48
  SPEAKER_00: It isn't simply Sam choosing any elevator and dropping off a truckload.
• 4:53
  SPEAKER_00: But Sam wants to sell his harvested corn to his usual local elevator.
• 4:57
  SPEAKER_00: He uses futures to protect against a falling price.
• 5:00
  SPEAKER_00: He doesn't want to deliver through the exchange.
• 5:03
  SPEAKER_00: The rules give him a way to end his futures obligation before the delivery process begins.
• 5:07
  SPEAKER_00: And here's how exactly that works.
• 5:10
  SPEAKER_00: Sam originally sold one December corn contract.
• 5:13
  SPEAKER_00: To end that trade, he buys one December corn contract for the same year, covering the same 5,000 bushels in the same trading account.
• 5:21
  SPEAKER_00: The contracts must match.
• 5:23
  SPEAKER_00: Buying a week contract or a contract for another month would not end this corn agreement.
• 5:28
  SPEAKER_00: Why does buying a matching contract work?
• 5:30
  SPEAKER_00: Because the trading system matches his agreement to sell with an equal agreement to buy.
• 5:36
  SPEAKER_00: Under the exchange's rules, those opposite agreements cancel his remaining delivery obligation.
• 5:41
  SPEAKER_00: He no longer has to supply corn through that contract, and he doesn't have to receive corn through it either.
• 5:47
  SPEAKER_00: But any money he gained or lost while that price changed still counts, that does not disappear.
• 5:53
  SPEAKER_00: He doesn't have to find the original buyer and ask permission.
• 5:56
  SPEAKER_00: His broker, the firm handling his trades, arranges the matching purchase through the market.
• 6:01
  SPEAKER_00: Suppose Sam harvests and sells his real corn in October.
• 6:04
  SPEAKER_00: He can make that matching futures purchase in October, well before the December delivery process.
• 6:10
  SPEAKER_00: He doesn't have to wait until December.
• 6:12
  SPEAKER_00: There are specific deadlines, including deadlines before the delivery month starts.
• 6:17
  SPEAKER_00: His broker tells him when his trade must be ended to avoid delivery.
• 6:20
  SPEAKER_00: That's what closing the trade before delivery means.
• 6:24
  SPEAKER_00: Making the matching purchase in time to remove the obligation to deliver grain.
• 6:28
  SPEAKER_00: It does not mean ignoring the contract or walking away from money owed.
• 6:32
  SPEAKER_00: Why the local corn prices can be different.
• 6:35
  SPEAKER_00: Before we put dollars to this, there's one more piece.
• 6:38
  SPEAKER_00: The futures price is a common reference price.
• 6:41
  SPEAKER_00: Sam's local elevator may offer a different amount for his actual corn.
• 6:45
  SPEAKER_00: An elevator is a business that buys, stores, and handles grain.
• 6:48
  SPEAKER_00: Its offer depends on things such as local supplies, nearby buyers, and the cost of moving the corn.
• 6:54
  SPEAKER_00: Suppose futures are$5, but the elevator offers Sam$4.70.
• 6:59
  SPEAKER_00: That local offer is 30 cents below futures.
• 7:02
  SPEAKER_00: The difference is called basis.
• 7:04
  SPEAKER_00: People would describe that as 30 cents under.
• 7:06
  SPEAKER_00: Basis can change, and some buyers offer more than the futures price.
• 7:10
  SPEAKER_00: For our example, we'll keep the elevator's offer 30 cents below futures the whole time.
• 7:15
  SPEAKER_00: That lets us follow the money without changing everything at once.
• 7:18
  SPEAKER_00: So what happens if corn prices fall?
• 7:21
  SPEAKER_00: Remember, Sam sold his futures contract at$5.
• 7:25
  SPEAKER_00: Now it's October.
• 7:26
  SPEAKER_00: He has harvested his corn, and that same December futures contract is trading at$4.
• 7:31
  SPEAKER_00: His local elevator offers$3.70.
• 7:34
  SPEAKER_00: Sam sells 5,000 bushels of actual corn to the elevator for$370 a bushel.
• 7:39
  SPEAKER_00: At about the same time, he buys the matching futures contract at$4 to end his futures trade.
• 7:45
  SPEAKER_00: He sold the contract at$5 and bought it back at$4.
• 7:49
  SPEAKER_00: That leaves him with a futures gain of$1 for each of the$5,000 bushels covered.
• 7:54
  SPEAKER_00: That's$5,000 gained in his trading account before trading costs.
• 7:58
  SPEAKER_00: Meanwhile, the elevator pays him$370 a bushel for the grain.
• 8:02
  SPEAKER_00: Put those together,$370 from the corn plus$1 from the futures.
• 8:07
  SPEAKER_00: His combined result is$470 a bushel before fees and other costs.
• 8:11
  SPEAKER_00: The elevator still paid only$370.
• 8:14
  SPEAKER_00: The extra dollar came from his separate futures trade.
• 8:17
  SPEAKER_00: That is how futures help protect him when corn prices fell.
• 8:21
  SPEAKER_00: What happens if prices rise instead?
• 8:23
  SPEAKER_00: Let's go back and imagine a different October.
• 8:25
  SPEAKER_00: This time, December futures rise to$6 with the same 30 cent difference.
• 8:30
  SPEAKER_00: The elevator offers$5.70.
• 8:32
  SPEAKER_00: Sam gets$5.70 a bushel for his actual corn, but he originally sold his future contract at$5.
• 8:38
  SPEAKER_00: Now he must buy the matching contract at$6 to end that trade.
• 8:42
  SPEAKER_00: That creates a$1 loss per bushel in his trading account.
• 8:46
  SPEAKER_00: $570 from selling the corn minus$1 futures loss leaves$470 before costs.
• 8:53
  SPEAKER_00: Sam received more for the grain but lost money on the futures.
• 8:57
  SPEAKER_00: In the earlier example, he received less for the grain but gained money on the futures.
• 9:01
  SPEAKER_00: Using futures this way is called hedging.
• 9:04
  SPEAKER_00: Sam is using one transaction to help balance the price risk in another.
• 9:08
  SPEAKER_00: He gains some predictability but gives up the benefit of rising futures prices on those bushels.
• 9:13
  SPEAKER_00: And remember, we held that 30 cent local difference steady.
• 9:16
  SPEAKER_00: In real life, it can change, so his final result can change too.
• 9:20
  SPEAKER_00: But here's why Sam still needs money available.
• 9:23
  SPEAKER_00: The money in the futures account is adjusted daily as prices move.
• 9:27
  SPEAKER_00: Sam must keep a deposit there to help cover losses.
• 9:30
  SPEAKER_00: That deposit is called a margin.
• 9:32
  SPEAKER_00: If his trade loses money, the broker may require him to add more.
• 9:37
  SPEAKER_00: That request is called a margin call.
• 9:39
  SPEAKER_00: In our rising price example, Sam's corn became more valuable, but he was losing money on the futures.
• 9:45
  SPEAKER_00: He may have to pay those futures losses before the crop is harvested and sold.
• 9:50
  SPEAKER_00: So even a hedge that protects his overall selling price can create a need for cash along the way.
• 9:55
  SPEAKER_00: The original deposit is not the most he can lose, and futures don't protect him from everything.
• 10:01
  SPEAKER_00: If his crop fails, his futures obligations still exist.
• 10:05
  SPEAKER_00: If his production costs are too high, a protected selling price may still leave him losing money.
• 10:10
  SPEAKER_00: And that's why Sam has to consider his crop, his cost, and his available cash together.
• 10:21
  SPEAKER_00: And if you'd like more information about any of the topics we cover on our show, there's a matching blog for every episode we release.
• 10:27
  SPEAKER_00: And you'll find it on our website, farmtailsunplugged.com.
• 10:31
  SPEAKER_00: So there you have it.
• 10:32
  SPEAKER_00: That's your FarmTales Unplugged daily farm brief bonus weekend edition.
• 10:36
  SPEAKER_00: Understanding the grain markets for dummies, brought to you by World Trade X empowering farmers.
• 10:41
  SPEAKER_00: I'm Rick Portanova, and I'll see you Monday morning.