cancel
Showing results for 
Search instead for 
Did you mean: 
Honored Advisor

Re: futures now

Your borrowing money at 2%for six weeks, 

 

Costs me 1.85% to use it for 52 weeks.(Soon to go a little over two for me, but for the whole year, not just a little pie slice of it)

 

I'd say your not very credit worthy. And I'm the one who'll be broke shortly? And that new pickup has no lien, was an option I didn't order.

0 Kudos
Senior Contributor

Re: futures now

Why is the carry 45 cents for only 6 weeks time remaining until first delivery ? Not challenging that it is, just wondering what goes into that cost ? Transportation and storage costs of the cash dealer ? 

 

btw, I know more about carry than you think, one of my first jobs on Wall Street was being a basis trader in US Treasuries. Before there were computers, when we had to figure out accrued interest and extrapolate the real cost of buying cash against new issues, and then convert that cash difference into basis points of interest with only a pencil and a Monroe calculator. And that was back in the day when overnight interest rates for financing moved within a range of several percent every day, meaning that the prices for cash had to be adjusted by the hour and then the basis had to be re-calculated by hand so the sales desk properly priced inventory. When one mathematical mistake meant millions, not the hundreds or even thousands you might lose if the computer software has a hiccup.

 

Believe me, you are an amateur in the basis world compared to the basis traders in the bond market.  But that's why they earn the money they earn, they're a lot smarter than every body else.

 

btw, if it wasn't you and it wasn't so late, I would provide the math on why with six weeks to go and a discount interest rate of 2%, you would probably do better selling the futures contract at this point than selling for cash. But if you can't understand how a hedging strategy makes you an extra 10-15% of profit each year, I am afraid this derivation will be over your head.

 

But maybe I am wrong because I do not know what costs you absorb to deliver into a futures contract as opposed to delivering into the cash dealer. But I do know the cash basis came in today and the futures market had a lot of producer selling, and if the cash was a better deal the opposite would have happened - the basis would have spread wider and there would not have been as big a sell side in the December contract.

 

You'd be driving a Cadillac instead of a pickup if you took advantage of all the ways you could increase your revenues. I am not talking about pennies hen you multiply a few cents by thousands of bushels. Because as you would have learned in the fifth grade had you stayed long enough, big number times small number most always gives big number. 

0 Kudos
Senior Contributor

Re: futures now

I understand the basis, early in my career I was part of a dealer basis trading group in US Treasury new issues hedged with futures and cash, so I know the math. 

 

What I was wondering is what costs comprise the calculation for the basis in farming. Why is the cash dealer giving you 45 cents less than the futures market for corn that has only six weeks to delivery ? Is that 45 cents per bushel the cost for the cash dealer to store the grain ? I was thinking there may have been a transport cost involved in the basis fix, but the cash dealer is going to be transporting that corn whether you sell it to him now or in the future.

 

So what are the cash dealer's actual costs that make him set his purchase price 45 or 55 or 35 cents below the future's price ? What is the rationale in real expense items ?

 

And also, what costs does the farmer incur if you sell a futures contract and make delivery ? Can you deliver the corn to the same cash dealer to settle into a futures contract or are there special dealers that take delivery and process deliveries for grain delivered in satisfaction of a futures contract ? Is it more costly for you to deliver grain into a settlement of a futures contract as opposed to deliver to a cash dealer ? 

0 Kudos
Frequent Contributor

Re: futures now

Basis as applies to grains is the difference between the CBOT futures price and the local cash price for that contract month.

That is it. it is not complicated math.

 

Your reference to treasuries and bond likely has no correlation here.

 

When I sell corn for cash locally it goes to a feed mill, which in turn sells feed to livestock farmers

When Hobby sells to the ethanal plant they make ethanol and its byproducts.

There is no CBOT involved

In a way, the CBOT prices are irrelevant to these transactions between two parties.

 

Farmers do not make deliveries to or receive deliveries from the CBOT

0 Kudos
Senior Contributor

Re: futures now

Here's the calculation :

Assumptions :

You have 1000 acres of farmland, producing 150 bushels of deliverable corn per acre, for a total of 150,000 bushels, which is 30 futures contracts.

December futures contract this afternoon at $3.68

Cash price this afternoon at $3.26.

Re-investment rate of cash is 2%

Margin per one futures contract is $880

 

Scenario 1

Sell 5000 bushels today for cash at a price of $3.26

Receive $16,300 cash, which you re-invest in a money market fund or CD at 2% for the next 42 days until first delivery date into the December futures contract

You earn $37.51 in interest for every 5000 bushels sold today

 

Scenario 2

You sell one futures contract today representing 5000 bushels at a price of $3.68

You send $880 margin and $5 commission and fees from your money market account into your futures account, and lose interest on that money for 42 days until first delivery date into the December futures contract, costing you $2.04 in interest you would have received if the $885 stayed in the money market account.

Receive credit of $18,400 from sale of one contract representing the sale of 5000 bushels at $3.68 

 

At first delivery date in 42 days, you make delivery on your futures contract and receive the $18,400 sales proceeds and the $880 margin. Since the margin was supplied by you to begin with, your actual revenue is $18,400 less the $2.04 you lost in interest less the cost you incurred to store the corn for 42 days, less the $2.04 in interest that you gave up on the $885 of margin cost and commission. 

 

That compares to the $16,337.51 you received from the cash sale plus 42 days of interest on the sales proceeds. 

 

So the sale in the futures as opposed to the cash gained you $2,060.45 less your costs of storage, which I am hard pressed to believe is anywhere near $2,000 for 42 days. And that's just on 5000 bushels. I will admit, if there are delivery charges and excess transport charges above what you pay to deliver to the cash dealer who makes delivery to the CBOT depot, that would subtract as well from your profit.

 

Now you may ask what happens if prices change while you are holding the futures contract. Well, if prices go down, you have no issue because in both scenarios you sold at a fixed price. If prices go up it does not affect you for the same reason. The buyer of the futures contract you sold and delivered to will gain the benefit, but you still will get the sales proceeds calculated at the trade price of the contract.

 

So you see, this is not pennies. Its a couple of thousand dollars per every 5000 bushels you sell. If you have a thousand acres of corn, that's 30 contracts, and at a profit of $2,000 per contract over the proceeds from cash sales, that pickup's lease payments are fully paid for the next year. Hell, you could even buy the damned thing with the extra $60,000. 

 

Look, its late at night here after a long day that began for me about 20 hours ago, so if I missed anything please feel free to delineate. As I wrote, I don't know the costs of storage for 42 days on 5000 bushels of corn, nor the delivery costs associated with delivering into a futures contract. But even if I am wrong by 50%, you still pocket an extra thousand dollars by selling into the futures market rather than losing the basis cost by selling into the cash market.

 

Q.E.D.

 

 

 

0 Kudos
Senior Contributor

Re: futures now

Yes, the bond basis on Treasuries has an exact correlation to the grain basis insofar as the methods of calculating your costs and revenues are the same. Bond basis calculations are a lot more complex for a variety of reasons unique to the instrument, but in general you still wind up calculating your direct and associated costs and revenues as you do in grain basis calculations.The bond basis is the same definition as the grain basis, the price of the physical cheapest to deliver bond (which requires a complex set of formulae to determine) less the price of the nearest month future contract to deliver into. Cash minus futures. Please don't assume you know anything about the bond basis calculations, because unless you have experience in working in a bond basis operation you cannot understand all of the aspects of its mechanics and calculations. I have calculated both commodity and bond bases, so I understand the similarities. 

 

CBOT prices are directly relevant to your cash price, because the cash dealer is using those benchmarks as part of his calculation of what his basis will be and thus what his purchase price is.

 

Now for the main question, you wrote that farmers do not make deliveries into or receive deliveries from the CBOT. What if you sell a corn futures contract and want to deliver into that sale either on or after the first delivery date, how would you do it ?

0 Kudos
Honored Advisor

Re: futures now

You'd better research "delivery" on a CBOT contract. Start with locations .then go to how many are actually delivered on.

 

You are clueless, you might also discover why we as producers say the CBOT is broken and is only a casino. Check on freight rates from Spencer, Iowa or maybe Brookings, South Dakota to your required delivery point.

 

Just a duck with no water.....

0 Kudos
Frequent Contributor

Re: futures now

You buy it back before expiration.

If the hedge is successful then you will have a profit.

Its just a paper transaction

No one, at least not farmers, actually delivers physical grain to a CBOT point to settle these.

 

I read about this many years ago, so I don't remember exactly.

It may be possible that you could actually deliver grain, but there was some completely unreasonable cost to access that made it totally impractical to do.

 

While it is true that the CBOT is used as a benchmark for a local price.

Basis is what tells the local supply demand situation, and basis change is what gets grain moving or slows its flow.

0 Kudos
Frequent Contributor

Re: futures now

Sure, all your math may be correct, and all farmers completely understand that, but your initial assumption is not.

That assumption being that you can receive the actual futures price for the grain.

If you are a futures trader specializing in corn, you should know that.

You obviously think you are pretty smart, but you have a long way to go to be smart enough to be a farmer.

0 Kudos
Senior Contributor

Re: futures now

Did you read the part that said tell me what I have left out ? 

 

What deductions do you think are made from the sales proceeds of a delivery on a futures contract and what is the dollar amount that would subtract fromn the $2000+ profit I calculated of selling/delivering futures as opposed to cash ? 

 

I don't want to be smart enough to be a farmer, I earn a good living already. I just wish that all you smart f*cking farmers knew how to answer a f*cking question instead of giving me a ration of your bullsh*t. Now either answer the question with dollars and cents like I gave you in my example or you can go f*ck off with the other ***** Hobby.

0 Kudos