Question
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. |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started