Grain merchandising describes the process of buying and selling grain . ... However, storing grain is an inherently risky business as it leaves merchandisers subject to volatile commodity prices. Hedging. • Hedging in futures markets provides merchandisers with the main tool to conduct PRICE RISK MANAGEMENT.
What is grain hedging?
Hedging is defined as taking equal but opposite positions in the cash and futures market . For example, assume a producer who has harvested 10,000 bushels of corn and placed it in storage in a grain bin. By selling 10,000 bushels of corn futures the producer is in a hedged position.
What is basis in grain trading?
Basis is the difference between the cash price paid for your grain and the nearby Chicago Board of Trade futures price . Basis is often called “the voice of the market” because it’s an indication of whether or not the market wants your grain. A narrow or improving cash basis is a signal that the market wants your grain.
What is basis hedging?
Basis risk is the potential risk that arises from mismatches in a hedged position . Basis risk occurs when a hedge is imperfect, so that losses in an investment are not exactly offset by the hedge. Certain investments do not have good hedging instruments, making basis risk more of a concern than with others assets.
How do grain merchandisers make money?
This is how a Grain Merchandiser makes his/her money by buying and selling good basis levels and utilizing hedging to eliminate the risk of the futures price moving against them.
What is the purpose of hedging?
Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset . The reduction in risk provided by hedging also typically results in a reduction in potential profits.
How do grain markets work?
Grain prices are established in two different markets. Futures contracts are traded via a commodity exchange for a certain delivery month. ... If the cash market is a bid of $3.00 per bushel, and the futures price is $3.25, the local basis is then 25-cents-per-bushel or the difference between the two.
How do you calculate grain basis?
Basis is the difference between the futures price and your local cash price . For example, if the May futures contract is trading at $2.96 and the cash price is $2.63, the cash price is 33 cents under May ($2.63 – 2.96 = -33 cents). So the basis is -33 cents.
What is positive basis?
The basis reflects the relationship between cash price and futures price. ... A positive basis is said to be “over” as the cash price is higher than the futures price . A negative basis is said to be “under” as the cash price is lower than the futures price.
How do you read a basis?
Local cash price – futures price = basis . In this example, the cash price is 20 cents lower than the December futures price. In market “lingo” you’d say the basis is “20 under December.” On the other hand, if the cash price is 20 cents higher than the December futures price, you’d say the basis is “20 over December.”
What is perfect hedge?
A perfect hedge is a position undertaken by an investor that would eliminate the risk of an existing position , or a position that eliminates all market risk from a portfolio. In order to be a perfect hedge, a position would need to have a 100% inverse correlation to the initial position.
How do you mitigate basis risk?
The simplest way to mitigate your exposure to basis risk is to enter into supply (in the case of a consumer) or marketing (in the case of a producer) agreements that reference a “primary” index (i.e. NYMEX natural gas furtures, ICE Brent crude oil, etc) or one of the numerous, liquid (actively traded) regional indices ...
What is short hedge?
A short hedge is an investment strategy used to protect (hedge) against the risk of a declining asset price in the future . ... A short hedge involves shorting an asset or using a derivative contract that hedges against potential losses in an owned investment by selling at a specified price.
How much do grain traders earn?
Average Salary for a Grain Trader
Grain Traders in America make an average salary of $100,823 per year or $48 per hour. The top 10 percent makes over $172,000 per year, while the bottom 10 percent under $58,000 per year.
How do you become a grain merchandiser?
Many grain merchandisers have a bachelor’s degree in agriculture science, finance, or a related field , in addition to experience working somewhere like a grain elevator, processor, or feeder. Some grain merchandiser jobs may only require on the job experience.
Where do grain merchandisers work?
They buy from farmers at a basis price at harvest, which is set based on the futures price, or the amount a buyer agrees to pay at a later date. Merchandisers often work for grain elevators, processors, or businesses that can hold the grain until resale.
