B32—Lancaster Farming, Thursday, December 24,1981
Farming’s Futures
By David K. Sauder
Commodity Advisor
Trade Tech, Lancaster
Is there a best delivery month in
which to hedge?
The fact that the price is the
highest for one particular futures
delivery month—that the July
futures prices, for example, is
higher than the May futures
price—doesn’t necessarily mean
this is the most profitable month in
which to hedge. Or that it will
necessarily yield the highest net
payment for storage.
To make this decision, you need
to take into account not only the
various futures prices and the
carrying charges they reflect but
also the probably basis. It’s yet
another way in which basis
knowledge can be useful—and,
indeed invaluable—in making
marketuig decisions.
For example assume the May
futures price of corn is $2.50 and
the July future price is
simultaneously $2.56. At first look,
that appears to be a payment of 3
cents a month for storing corn
from May to July.
But if your records indicate the
normal basis for your area is 20
cents in May and 24 cents in July,
the futures market is offering you
a net of $2.30 ($2.50 minus 20 cents)
for corn delivered in May and $2.32
($2.56 minus 24 cents) for corn
delivered in July. Chances are you
would want to think twice before
storing corn for a payment of a
penny a month.
- Merry Christmas g
I
Happy New Year
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What action can a hedger take if
the basis is unfavorable?
Assume the same facts as m the
previous example except that, as
the delivery month is approached,
the basis is a much wider than
expected 35 cents a bushel. Selling
your crop locally and lifting the
hedge that was placed at a futures
price of $2.50 would net you only
$2.15 for your corn. What can you
do about it?
One alternative to consider is
moving the hedge forward into
another delivery month in the hope
that it eventually can be lifted at a
higher net price. That is, that the
futures price minus the basis will
be higher than $2.15 a bushel.
Moving a hedge forward can be
accomplished simply by buying in
the existing futures contract and
simultaneously selling a similar
contract in a later delivery month.
Such as by buying in a March
contract and selling a May con
tract. Or by buying in a May
contract and selling a July con
tract. Any carrying charge dif
ference between the two contracts
should provide you a payment for
the extended storage.
Example: Assume (for the sake
of simplicity) that the March
contract sold at $2.50 is still $2.50
and that the local cash price is 35
cents lower at $2.15. If you decide
this is an unacceptably low price,
you may wish to buy in the March
Wishing You f
The Blessings I
Of This Joyous I
Season and |
Throughout the |
New Year S
contract and sell a May contract
at, say, $2.58. It the basis by May
returns to a more normal 2d cents,
you will be able to sell your crop
and lilt the hedge at a net price of
$2.38 a bushel (.the futures price of
$2.58 less the 25 cents basis).
Can a hedge be lifted sooner than
planned?
A hedge can be lifted at any tune
simply by buying in the futures
contract at the prevailing price.
There could be circumstances in
which this might be to your ad
vantage.
For example, assume that at
harvest you placed your crop in
storage and, in order to protect
yourself against a possible decline
in price, by hedged by selling a
futures contract. Since then,
however, there are indications that
prices during the spring and
summer may move shaipij
higher. To take advantage of the
expectated higher prices, you may
decide to lift the hedge. (The risk
that you run in doing so, of course,
is that time may prove that you
were wrong about the direction of
prices.)
Another opportunity to lift a
hedge earlier than planned could
result from a sudden and unex
pected narrowing of the basis
due, for example, to a significant
increase in the local price relative
to the futures price, or from a
larger decline in the futures price
than in the local cash price. Lifting
the hedge and selling your crop
sooner than planned to take ad
vantage of the narrow .basis could
result in a higher price and savings
on storage costs.
In addition to the situations just
discussed, you may want to lift a
hedge sooner than anticipated
simply because the cash price of
the commodity has declined to a
level at which you are now willing
to own it without price protection.
Any subsequent increase in the
price once the hedge is lifted
should then result in a profit (to the
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RD3 - Box 84, Mifflinburg, Pa. 17844 - Phone: 717-966-2736
U.S.
agricultural nominee
WASHINGTON, D.C. - By an
affirmative voice vote, the Senate
last Wednesday approved the
presidential nomination of Kalo A.
Hineman to be a commissioner of
the- Commodity Futures Trading
Commission.
Lasjt Monday, the Senate Com
mittee on Agriculture, Nutrition,
and Forestry held hearings on
Hineman’s nomination. In a
meeting Tuesday, the Committee
unanimously recommended to the
Senate that the nomination be
approved.
Senator Jesse Helms, chairman
of the Senate Agriculture Com
mii'ee, said, “Kalo Hineman will
provide an excellent service to the
CFTC. With his extensive and
intimate knowledge of the day-to
day workings of agriculture, he
will bring a special and
necessary dimension to the
CFTC.”
Hineman, a native of Dighton,
Kansas, has been farming for 34
years. He and his son operate a
2,500-acre wheat and tnilo farm.
On an additional 2,500 acres, they
also have a 200-head cow-calf
operation. Hineman is also in
volved in marketing Stocker calves
and yearlings as well as finished
cattle.
He has been a member of the
Kansas House of Representatives
since 1974. He has also been active
in numerous agricultural
organizations, including the Farm
extent the increase exceeds
storage costs).
Send your questions on futures
trading to Farming’s Futures,
Lancaster Farming Newspaper,
Box 366, Lltitz, PA 17543.
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