Mint Chocolate Chunk (MCC) ice cream made by Graetters of Cincinnati, OH contains specially-made confectioners chips the size of Prof. Ernsts big toe...its insanely good stuff. Unfortunately, its made in very small batches to maintain creamy mint quality, and it doesnt travel well. Graetters wants to compete with PennState Creamery and is considering opening a small-batch processing plant in State College. But they have to figure out how to ship the special chocolate chips in from their Ohio cho colate manufacturing center while maintaining quality. Or should they forget local production and ship finished product in from Cincinnati if the border is open? Things are getting expensive. So lets help make some decisions... Graetters can make money selling MCC for $4.75/pint in Ohio. To ship in the chocolate and make MCC in State College will put the price at $8/pint and people cant get enough of it at that price.

Here is a scenario for you to calculate the financial outcome of your hedging and physical crop production scenario. Ive provided you with tables I use in class as a way to help you organize your work. In May: o October futures contract is $4.50/bu. o Basis is $0.17 o What is expected local price in October? o You sell an October futures contract now for $3 and $0.01/bu commission o If futures & local prices stay the same, what can you expect to make in October? In October: o You have 5,000 bushels due to deliver on the futures contract from May at $4.50/bu o Basis is $0.15 and commission is still the same o The cost of buying that October futures to offset your May futures sale is actually $3.75 and you buy one.

May (per bushel) $4.50 0.17 October (per bushel) $3.75 0.15 Future Price Local Basis Local Price Commission 0.01 0.01 When Action (what you do) Farmer earns Commission? Net Earnings |May October Hedge Net/bushel October Net Crop Revenue/bushel Total Revenue for the Crop