You have a hog finishing operation. In November, you decide to buy 4 contracts of May corn futures to lock-in your input costs on 20,000 bushels of corn to be purchased in March, April and May.
I want you to complete the transaction, under three different scenarios; higher futures prices, lower futures prices and steady futures prices. Fill in the blanks in the T-diagram, showing the price you received in $/bushel or in gross sales revenues (price * quantity). Ignore brokerage costs.
Scenario #1: higher futures prices
|
Date |
Cash |
Futures |
Basis |
|
November |
Corn harvest is over and you are concerned about the possibility of corn costs rising next spring. |
Buy 4 contracts of May corn futures to lock in a purchase price on corn to be fed in March, April and May. Futures price: $5.26 |
Expected corn basis a local buying basis of -$0.30/bu., or 30 cents under the May contract. futures price + expected basis = expected price $5.26 + (-$0.30) = $4.96 |
|
March |
Buy 20,000 bushels of corn from local sources for $6.03/bu. |
Offset the hedge – sell May corn futures at $6.39/bu. |
What is the corn basis in March? $/bu. _____________ |
|
Results |
What did you pay for corn in the cash market? $/bu. _____________ $total _____________ |
What was your gain or loss in the futures market? $/bu. _____________ $total _____________ |
What final price did you pay for corn? $/bu. _____________ $total _____________ |
Scenario #2: lower futures prices
|
Date |
Cash |
Futures |
Basis |
|
November |
Corn harvest is over and you are concerned about the possibility of corn costs rising next spring. |
Buy 4 contracts of May corn futures to lock in a purchase price. Futures price: $5.26 |
Expected corn basis a local buying basis of 30 cents under the May contract. expected price = $5.26 + (-$0.30) = $4.96 |
|
March |
Buy 20,000 bushels of corn from local sources for $4.41/bu. |
Offset the hedge – sell May corn futures at $4.65/bu. |
What is the corn basis in March? $/bu. _____________ |
|
Results |
What did you pay for corn in the cash market? $/bu. _____________ $total _____________ |
What was your gain or loss in the futures market? $/bu. _____________ $total _____________ |
What final price did you pay for corn? $/bu. _____________ $total _____________ |
Scenario #3: steady futures prices
|
Date |
Cash |
Futures |
Basis |
|
November |
Corn harvest is over and you are concerned about the possibility of corn costs rising next spring. |
Buy 4 contracts of May corn futures to lock in a purchase price. Futures price: $5.26 |
Expected corn basis a local buying basis of 30 cents under the May contract. expected price = $5.26 + (-$0.30) = $4.96 |
|
March |
Buy 20,000 bushels of corn from local sources for $4.99/bu. |
Offset the hedge – sell May corn futures at $5.26/bu. |
What is the corn basis in March? $/bu. _____________ |
|
Results |
What did you pay for corn in the cash market? $/bu. _____________ $total _____________ |
What was your gain or loss in the futures market? $/bu. _____________ $total _____________ |
What final price did you pay for corn? $/bu. _____________ $total _____________ |
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