B. Farmer Production II: Assume that your family farm is located in the Thumb of Michigan which is one of the most diverse growing regions of the country where you might grow five different crops such as wheat, corn, soybeans, dry beans and sugar beets. Your father is paying for you to go to Michigan State and earn a degree in Ag Business Management so that you can come back and eventually take over the farm. The sugar beets and dry beans are Page 2 of 7 grown under contract every year while the soybeans, wheat and corn are sold in the cash market. Planning has become more difficult each year given the volatility of corn, wheat, and soybean prices. It is the spring (April 30, 2021) and your father has asked you to develop a strategic risk management program to reduce the uncertainty for corn and soybeans. Here are the specific pieces of information that he is giving you to structure the plan: . 600 acres will be planted in corn this year, with a five-year average yield of 166.7 bushels per acre. (note, assume that acres harvest will be the same as acres planted) 600 acres will be planted in soybeans this year, with a five-year average yield of 50 bushels per acre. (note, assume that acres harvest will be the same as acres planted) . Since your father has never hedged before he would like to scale into the process: He wants to hedge 40% of the corn production, and Hedge 33.3% of the soybeans production . Here is the current market information from the CME/CBOT Price Unit: Cents and quarter-cents/bu. Corn Market: April 30, 2021 Contract Size = 5,000 bushels MONTH OPEN HIGH LOW SETTLE 21-May 402'4 4064 4012 4060 JLY 21 404'0 407'2 402'4 407'2 21-Sep 383'6 387'6 3832 387'2 21-Dec 3834 387'6 383'2 387'2 Price Unit: Cents and quarter-cents/bu. Soybean Market: April 30, 2021 Contract Size = 5,000 bushels MONTH OPEN HIGH LOW SETTLE 21-May 10360 10496 10350 1044'6 JLY 21 10346 1048'OB 1033'6 10432 21-Aug 1029'2 1036'2B 1023'4A 1032'4 21-Sep 996'2 1002'4B 990'6A 997'4 21-Nov 9660 975'4B 9632 9710 1. How many bushels of corn are expected to be produced? (2 pts.) (show work) 2. How many bushels of soybeans are expected to be produced? (2 pts.) (show work) 3. How many futures contracts will you need for corn given 40% coverage? (4 pts.) (show work) 4. How many futures contracts will you need for soybeans given 33.3% coverage? (4 pts.) (show work) Futures Market Information 5. You hedge the DEC21 corn contract(s) at the settle price for the day. What is the settle price in dollars? (2 pts.) 6. You hedge the NOV21 soybean contract(s) at the settle price for the day. What is the settle price in dollars? (2 pts.) 7. When November 1st rolls around, you offset your futures position for soybeans. The November futures contract price is now $9.2550/bu. Also on November 1st, you sell the soybeans that you have harvested on the cash market at the same price of $9.255/bu. a. What is your per bushel profit or loss in the futures market? (4 pts.) b. What is your total profit/loss in the futures market? (4 pts.) B. Farmer Production II: Assume that your family farm is located in the Thumb of Michigan which is one of the most diverse growing regions of the country where you might grow five different crops such as wheat, corn, soybeans, dry beans and sugar beets. Your father is paying for you to go to Michigan State and earn a degree in Ag Business Management so that you can come back and eventually take over the farm. The sugar beets and dry beans are Page 2 of 7 grown under contract every year while the soybeans, wheat and corn are sold in the cash market. Planning has become more difficult each year given the volatility of corn, wheat, and soybean prices. It is the spring (April 30, 2021) and your father has asked you to develop a strategic risk management program to reduce the uncertainty for corn and soybeans. Here are the specific pieces of information that he is giving you to structure the plan: . 600 acres will be planted in corn this year, with a five-year average yield of 166.7 bushels per acre. (note, assume that acres harvest will be the same as acres planted) 600 acres will be planted in soybeans this year, with a five-year average yield of 50 bushels per acre. (note, assume that acres harvest will be the same as acres planted) . Since your father has never hedged before he would like to scale into the process: He wants to hedge 40% of the corn production, and Hedge 33.3% of the soybeans production . Here is the current market information from the CME/CBOT Price Unit: Cents and quarter-cents/bu. Corn Market: April 30, 2021 Contract Size = 5,000 bushels MONTH OPEN HIGH LOW SETTLE 21-May 402'4 4064 4012 4060 JLY 21 404'0 407'2 402'4 407'2 21-Sep 383'6 387'6 3832 387'2 21-Dec 3834 387'6 383'2 387'2 Price Unit: Cents and quarter-cents/bu. Soybean Market: April 30, 2021 Contract Size = 5,000 bushels MONTH OPEN HIGH LOW SETTLE 21-May 10360 10496 10350 1044'6 JLY 21 10346 1048'OB 1033'6 10432 21-Aug 1029'2 1036'2B 1023'4A 1032'4 21-Sep 996'2 1002'4B 990'6A 997'4 21-Nov 9660 975'4B 9632 9710 1. How many bushels of corn are expected to be produced? (2 pts.) (show work) 2. How many bushels of soybeans are expected to be produced? (2 pts.) (show work) 3. How many futures contracts will you need for corn given 40% coverage? (4 pts.) (show work) 4. How many futures contracts will you need for soybeans given 33.3% coverage? (4 pts.) (show work) Futures Market Information 5. You hedge the DEC21 corn contract(s) at the settle price for the day. What is the settle price in dollars? (2 pts.) 6. You hedge the NOV21 soybean contract(s) at the settle price for the day. What is the settle price in dollars? (2 pts.) 7. When November 1st rolls around, you offset your futures position for soybeans. The November futures contract price is now $9.2550/bu. Also on November 1st, you sell the soybeans that you have harvested on the cash market at the same price of $9.255/bu. a. What is your per bushel profit or loss in the futures market? (4 pts.) b. What is your total profit/loss in the futures market? (4 pts.)
