# solution

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 _____________