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Assume you are a wheat producer in eastern Colorado. You have 3200 acres (or 5 sections) in production and your potential yield (based on a

Assume you are a wheat producer in eastern Colorado. You have 3200 acres (or 5 sections) in production and your potential yield (based on a trend-yield projection) is 37.5 bushels per acre. Production costs are $145 per acre.

It is currently December 1, 2020. You are considering hedging some of the wheat crop which you will market at harvest in early-July or which you will store until early-October. If you store the grain, you will only do so until October because you will need the cash flow to meet a production operating note payment. We will use the basis information that is similar to what was constructed from Problem Set 1.

You have made a small basis table and include the basis information for the relevant months. Averages and standard deviations are reported below.

Potential Futures Contracts

Calendar Month

MAR

MAY

JULY

SEP

DEC

Harvest Transaction Month

July

----

----

-0.56

(0.47)

-0.65

(0.53)

----

Storage Transaction Month

October

-0.98

(0.50)

-1.01

(0.52)

----

----

-0.85

(0.48)

C. Assume you decided to hedge all of your anticipated production in December. It is now July 1, 2021 and the KC wheat futures prices at harvest are

7/1 JUL $4.95/bu.

SEP $5.08/bu.

DEC $5.25/bu.

MAR22 $5.40/bu.

MAY $5.27/bu.

JUL $5.20/bu.

Complete the following T-account below assuming the actual basis at harvest is 39 cents per bushel weaker than expected, and assuming you achieved your expected production.

Date

Cash

Futures

Basis

12/1

2020

Forward Price = $5.25/bu.

________ __ contracts

(Buy or Sell) (#)

$___/bu.

(expected)

of _____ wheat

(contract month and year)

@ $____/bu

7/1

2020

Cash Wheat @ $____/bu.

________ __ contracts

(Buy or Sell) (#)

$____/bu.

(actual)

of _____ wheat

(contract month and year)

@ $____/bu

Futures Gain/Loss $____/bu.

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