Scenario #2 Storage Hedge A corn producer has planted 350 acres and anticipates his yield to be 135 bushels per acre (47,250 bu). He sets his marketing price objective at $3.35/bu. Prices currently look good but are expected to fall before harvest. Part 1...July 15 Assumptions a. Farmer expects corn harvest complete by Nov-1 b Forward prices for deliver at harvest and after are as follows Harvest in Sept, Oct, Nov Dec Mar 3.00 3.25 3.37 c. Corm futures are as follows Dec Mar 3.65 3.77 d. The average historical basis at harvest is $0.50 under the December. e. The average historical basis in the last half of November is $0.20 under the December. f. The nearby basis does not strengthen much after December The farmer has on-farm storage for 30,000 bushels and estimates costs at $0.06 per bushel g. per month h. Commission costs for hedging are $0.01/bu Determine. a. Whether he should forward contract or hedge, in which month, and why (consider storage costs) b. What he could expect to make per bushel by hedging c. The futures month that would give him the best return on a hedge d. His action in the futures market e. The number of contracts needed to hedge approximately 20 percent of expected production f. How the expected net price from hedging compares to his price objective Part 2...Assumptions on Nov-29 a. Harvest is completed on time and corn is in storage by Nov-1 b. The cash price for immediate delivery is $2.85/bu c. Dec corn futures are trading at $3.05/bu d. He hedged and decides to offset his hedge Determine... a. The nearby basis b. His actions in the cash and futures markets c. Whether he gained or lost on the Dec corn futures position d. The basis gain or loss on the transaction e. The outcome of his hedge (cash, futures, storage) f. How price per bushel compares with his marketing price objective Scenario #2 Storage Hedge A corn producer has planted 350 acres and anticipates his yield to be 135 bushels per acre (47,250 bu). He sets his marketing price objective at $3.35/bu. Prices currently look good but are expected to fall before harvest. Part 1...July 15 Assumptions a. Farmer expects corn harvest complete by Nov-1 b Forward prices for deliver at harvest and after are as follows Harvest in Sept, Oct, Nov Dec Mar 3.00 3.25 3.37 c. Corm futures are as follows Dec Mar 3.65 3.77 d. The average historical basis at harvest is $0.50 under the December. e. The average historical basis in the last half of November is $0.20 under the December. f. The nearby basis does not strengthen much after December The farmer has on-farm storage for 30,000 bushels and estimates costs at $0.06 per bushel g. per month h. Commission costs for hedging are $0.01/bu Determine. a. Whether he should forward contract or hedge, in which month, and why (consider storage costs) b. What he could expect to make per bushel by hedging c. The futures month that would give him the best return on a hedge d. His action in the futures market e. The number of contracts needed to hedge approximately 20 percent of expected production f. How the expected net price from hedging compares to his price objective Part 2...Assumptions on Nov-29 a. Harvest is completed on time and corn is in storage by Nov-1 b. The cash price for immediate delivery is $2.85/bu c. Dec corn futures are trading at $3.05/bu d. He hedged and decides to offset his hedge Determine... a. The nearby basis b. His actions in the cash and futures markets c. Whether he gained or lost on the Dec corn futures position d. The basis gain or loss on the transaction e. The outcome of his hedge (cash, futures, storage) f. How price per bushel compares with his marketing price objective