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Group Title: Circular Florida Cooperative Extension Service
Title: A Microcomputer program for grain marketing strategies
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Permanent Link: http://ufdc.ufl.edu/UF00094896/00001
 Material Information
Title: A Microcomputer program for grain marketing strategies
Series Title: Computer series - Florida Cooperative Extension Service ; 566
Physical Description: 14 p. : ; 28 cm.
Language: English
Creator: Eason, Mark, 1957-
Smiley, Steve
Levins, Richard A
Publisher: Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 1983
Copyright Date: 1983
 Subjects
Subject: Grain -- Marketing -- Computer programs   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
non-fiction   ( marcgt )
 Notes
General Note: Cover title.
Statement of Responsibility: Mark Eason, Steve Smiley, Dick Levins.
 Record Information
Bibliographic ID: UF00094896
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: oclc - 10759238

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Full Text
SHUMIE LIBRARY,
May 1983 \. <-Y- Circular 566
F.A.S.- Unv. of Florida
A MICROCOMPUTER
PROGRAM FOR GRAIN
MARKETING STRATEGIES
COMPUTER SERIES


Florida Cooperative Extension Service / Institute of Food and Agricultural Soiences / University of Florida / John T. Woeste, Dean











A MICROCOMPUTER PROGRAM FOR

GRAIN MARKETING STRATEGIES

by

Mark Eason, Steve Smiley, Dick Levins



Forward contracting and hedging in the futures market are

marketing tools which farmers can selectively use to reduce

their risks and insure profits. In using these tools, farmers

seek price stability and predictability for their operations.

A considerable amount of time and effort, however, is needed

to determine if a given marketing strategy is profitable.

The microcomputer program presented here performs the

calculations quickly and accurately. The program gives the

farmer the opportunity to compare the income which can be

expected from different combinations of hedging, forward

contracting, and cash sales.



COMPARING MARKETING ALTERNATIVES

The cash market is relatively simple to use. The

producer is paid the current cash price at the time of the

sale. All sellers with similar quality product receive about

the same price regardless of whether the price is high or low.

A real disadvantage of the cash market is that farmers

-------------------------------------------------------
Area Economist, Graduate Research Assistant, and Extension
Farm Management Specialist, Food and Resource Economics
Department, IFAS, University of Florida.

1











produce for an unknown cash price and therefore bear the full

risk of adverse price fluctuations. If prices move

drastically lower at harvest time, the producer must either

accept the low price or make arrangements for storage. If

prices move higher, of course, the producer may realize a

large profit. Another disadvantage of the cash market is the

difficulty producers have in making production decisions based

on an unknown sale price.

Forward contracting with a buyer prior to harvest also

has good and bad points. Knowing the price which will be

received before the product is harvested is the primary

benefit of forward contracting for the producer. Better

production and harvesting planning decisions can be made.

Like the cash market, forward contracting requires no margin

money. And unlike the futures market, forward contracts are

not for specific standard sizes. Instead, the contract size

is negotiated between buyers and sellers.

A major disadvantage of using forward contracts is

reduced flexibility. For example, if a grain producer

contracts to deliver grain at harvest, the option of storing

in hopes of achieving higher prices is lost. Forward

contracting also means that the buyer takes some risk in

setting an exact price, so the offering price will be reduced

to offset this risk. In addition, the producer must deliver

at the price set in the forward contract even if the cash









price at harvest time is much higher.

In the futures market, as in forward contracting, the

price is established before delivery or closing period of the

contract. The producer can better evaluate the profit

potential of production decisions while the crop is being

grown. The futures market also provides maximum market

flexibility because a buyer or seller can offset their market

position at any time. In this way, the producer can cut

losses and take profits as the opportunities appear. Another

advantage of the futures market is that prices are set in a

competitive market with many buyers and sellers. Oftentimes

there is limited competition in cash markets and forward

contracting.

Relatively few farmers use the futures market because it

is considerably more complex than cash markets. To hedge

effectively in the futures market requires knowledge of how

the market works, a good broker, and a well-designed trading

plan. Margin money or "good faith" money insures performance

of the contract and is required in futures trading. One

difficulty some producers may have using the futures market is

that futures contracts are often defined in commodity units

which are too large to be useful for a small producer.

The difference between the futures and today's local cash

price is called the "basis". Supply and demand,

transportation costs, storage space, and quality factors all

influence the basis. Knowledge of the normal seasonal basis









relationship is essential to effectively using futures markets

to improve marketing decisions. As a general rule, producers

benefit from a narrowing of the basis from the point when the

contract was established until termination. Likewise, a

widening of the basis always works to the disadvantage of the

producer.



OVERVIEW OF THE MICROCOMPUTER PROGRAM

The basis, forward contract prices, and futures market

prices are always changing. Farmers must therefore

continually recalculate the profitability of different

marketing alternatives. This tedious process is greatly

simplified by using the microcomputer program presented here.

In a few seconds the program calculates the profitability of

undertaking any combination of marketing strategies. The

calculations can be repeated as often as desired.

The program first asks for information necessary to carry

out the analysis. The breakeven price, in dollars per acre,

includes all planting, growing, harvesting costs, and the cost

of transporting the product to the cash market. The current

forward contract price is normally obtained from the local

elevator. The brokerage fee for a complete round-turn on a

futures contract and the current futures price is available

from a commodities broker. The expected basis at harvest time

is the producer's best estimate based on current conditions

and past trends.








Think carefully before entering the expected cash price

at harvest. The computer calculates the profitability of

different marketing alternatives using a range of cash prices

based on the estimate entered by the user. The hedger is wise

to re-run the program several times using different expected

cash prices at harvest. An accurate estimate of the expected

yield per acre is also crucial to the outcome, even though the

computer again uses a range of expected yields. The computer

next asks for the number of acres planted in the specific

crop. The user is then given a chance to re-enter all these

numbers if some were entered incorrectly.

In the next part of the program the user has the

opportunity to discover the most profitable combination of

marketing outlets. The computer first displays the number of

bushels the user can expect to harvest based on the number of

acres planted and the expected yield. This amount is the

maximum number of bushels which the producer may hedge in the

futures market without being a speculator. At this point in

the program the user may choose to hedge or forward contract

for any number of bushels. Any bushels not hedged or forward

contracted are assumed to be sold in the cash market. The

user may also choose to sell everything in one of the three

markets. The computer then gives the user the chance to

correct any wrong entries.

Now the computer goes to work. It first displays the

figures already entered by the user. A table is displayed









which shows the returns beyond the production costs that would

be earned based on the numbers entered and marketing strategy

chosen. The table displays three possible yields since a

producer is never sure exactly how many bushels per acre will

be harvested. The profitability is also calculated based on

five different cash prices, the middle price being the

expected cash price entered by the user. The table shows a

range of possible outcomes for the numbers and estimates which

were entered.

The next table displayed is very similar in appearance to

the first table. The same range of numbers for yield appear

across the top, and the identical set of prices appears along

the left-hand side of the screen. But instead of numbers

appearing in the rows and columns of the chart, the words

"WORSE", "SAME", or "BETTER" are displayed. These three words

tell the user whether or not the projected outcome at a given

price and yield is worse, the same, or better than could be

done by selling 100 percent of the crop for cash at harvest.

To determine how much better or worse the outcome is, run the

program again entering zeros when the program asks how many

bushels you will hedge and forward contract. Running the

program in this manner gives the returns from selling 100

percent of the crop for cash at harvest. Compare these

numbers to the numbers obtained when some portion of the crop

is hedged and/or forward contracted.

Pressing the ENTER (carriage return) key prompts the









computer to display another table entitled "Yield." At the

top of this table appears the range of possible yields which

appeared in the previous table. Based on the three expected

yields, the next row of numbers shows how many bushels the

user will have to purchase to fulfill the forward contracts

and hedging commitments if the actual yield at harvest is

lower than expected. Beneath these figures are a number of

rows which display the purchase cost for several prices per

bushel. The prices in these rows are the ones estimated in

the previous table. The three numbers beneath each price give

the purchase cost of buying the number of bushels required to

meet the shortfall at that cash market price.

After pressing the ENTER key, the user is given the

opportunity to enter a new marketing strategy based on the

same estimates and prices as before. In this way the user can

compare the profitability of several strategies in the space

of a few minutes. The user is also wise to re-run the program

using a different expected basis, since the basis is rarely

exactly as predicted. To enter a new basis and/or other new

estimates for yields and prices, the program must be run again

from the beginning.


A SAMPLE RUN

Here is what the display looks like on a sample run. The

numbers in italics are used here as examples and are not

provided by the computer.









In this example, the grower can produce soybeans at a

breakeven cost of $150 per acre. The current futures price is

$5.75 per bushel. The grower expects the basis at harvest to

be $.35 per bushel, and expects the cash price at harvest to

be $5.25 per bushel. The broker charges $0.01 per bushel for a

complete round-turn on a futures contract, and the current

forward contract price is $5.50 per bushel. Five hundred

acres of beans are planted and the expected yield is 30

bushels per acre:


UNIVERSITY OF FLORIDA
GRAIN MARKETING STRATEGY PROGRAM

TOTAL PRODUCTION COST ($/ACRE) ? 150
CURRENT FUTURES PRICE ($/BU) ? 5.75
EXPECTED BASIS ($/BU) ? .35
BROKERAGE FEE ($/BU) ? .01
CURRENT FORWARD CONTRACT
PRICE ($/BU) ? 5.50
EXPECTED CASH PRICE AT
HARVEST ($/BU) ? 5.25
NUMBER OF ACRES PLANTED ? 500
EXPECTED YIELD (BU/ACRE) ? 30

ARE TH-ES NUMBERS OK? (Y/N) ? Y.


In the next part, the user chooses a marketing strategy.

In this example, the producer expects to harvest 15,000

bushels of soybeans. The strategy to be evaluated is that of

hedging 5000 bushels in the futures market, contracting to

sell 5000 bushels at the current forward contract price, and

selling 5000 bushels in the cash market. At the end of the

season the producer offsets the futures market position with

sales in the cash market. The program assumes the futures









contract positions are offset on the same day the grain is

sold in the cash market and at the same price.

CHOOSE YOUR MARKETING STRATEGY

YOU EXPECT TO HARVEST 15000 BUSHELS

HOW MANY BUSHELS WILL YOU:
HEDGE ? 5000
FORWARD CONTRACT ? 5000

WANT TO CHANGE ANYTHING? (Y/N) ? N

The computer now re-displays all numbers and prints the

table showing the returns over breakeven price:

PRODUCTION COST ($/ACRE) 150
FUTURES PRICE ($/BU) 5.75
BASIS ($/BU) .35
FORWARD CONTRACT PRICE ($/BU) 5.5
TOTAL EXPECTED YIELD (BU) 15000
BU. HEDGED: 5000 CONTRACTED: 5000
**** RETURNS OVER PRODUCTION COST ****
YIELD
PRICE 25 30 35
3.67 -11375 -2200 6975
4.46 -9400 1750 12900
5.25 -7425 5700 18825
6.04 -5450 9650 24750
6.83 -3475 13600 30675
PRESS ENTER TO CONTINUE ? .

In the ranges estimated by the computer, the smallest

gain (largest loss) over the breakeven price is $11,375 and

occurs when yield is low and price is low. The largest gain,

$30,675, is realized at a high price and high yield. Not

every possible outcome yields a profit with this strategy.

The next table displayed shows whether the numbers

obtained in the first table give a better return over

breakeven price than 100 percent cash sales at harvest. In

this particular example, the combination of hedging 5000







bushels and forward contracting 5000 bushels gives a better

return than 100 percent cash sales if the price does not rise

higher than expected:

PRODUCTION COST ($/ACRE) 150
FUTURES PRICE ($/BU) 5.75
BASIS ($/BU) .35
FORWARD CONTRACT PRICE ($/BU) 5.5
TOTAL EXPECTED YIELD (BU) 15000
BU. HEDGED: 5000 CONTRACTED: 5000
100% CASH SALE AT HARVEST WOULD BE...
YIELD
PRICE 25 30 35
3.67 WORSE WORSE WORSE
4.46 WORSE WORSE WORSE
5.25 WORSE WORSE WORSE
6.04 BETTER BETTER BETTER
6.83 BETTER BETTER BETTER
PRESS ENTER TO CONTINUE ? .

Pressing the ENTER key prompts the computer to display

the table which calculates the cost of purchasing the

necessary beans if yield turns out to be 15 percent lower or

higher than expected. In this example, the total number of

bushels hedged and forward contracted does not exceed the

total number of bushels expected to be harvested. If the

number of bushels hedged and forward contracted exceeds the

number of bushels expected at harvest, this table contains

numbers other than zero.
YIELD
25 30 35
---- BUSHELS YOU NEED TO PURCHASE ---
0 0 0
PURCHASEHASE COST AT $ 3.67 /BUSHEL****
0 0 0
****PURCHASE COST AT $ 4.46 /BUSHEL****
0 0 0
****PURCHASE COST AT $ 5.25 /BUSHEL****
0 0 0
****PURCHASE COST AT $ 6.04 /BUSHEL****
0 0 0
****PURCHASE COST AT $ 6.83 /BUSHEL***
0 0 0

PRESS ENTER TO CONTINUE ?















Running the program a second time (without hedging or

forward contracting any bushels) and comparing the results to

those given in the first table of the first example verifies

that 100 percent cash sales at harvest only yields a higher

return if the cash price rises more at harvest than is

expected. Since no hedging or forward contracting takes

place, a second table showing whether or not the returns are

worse, the same, or better is not provided.

PRODUCTION COST ($/ACRE) 150
FUTURES PRICE ($/BU) 5.75
BASIS ($/BU) .35
FORWARD CONTRACT PRICE ($/BU) 5.5
TOTAL EXPECTED YIELD (BU) 15000
BU. HEDGED: 0 CONTRACTED: 0
**** RETURNS OVER PRODUCTION COST ****
YIELD
PRICE 25 30 35
3.67 -29125 -19950 -10775
4.46 -19250 -8100 3050
5.25 -9375 3750 16875
6.04 500 15600 30700
6.83 10375 27450 44525
PRESS ENTER TO CONTINUE ?

If the cash price remains the same or falls lower than

expected, the previous strategy of hedging 5000 bushels and

forward contracting 5000 bushels is preferable. As in the

previous example, no additional beans have to be purchased to

cover hedging or forward contracting for more than the

expected total number of bushels to be harvested:







YIELD
25 30 35
-BUSHELS YOU NEED TO PURCHASE ---
0 0 0
****PURCHASE COST AT $ 3.67 /BUSHEL****
0 0 0
****PURCHASE COST AT $ 4.46 /BUSHEL****
0 0 0
****PURCHASE COST AT $ 5.25 /BUSHEL****
0 0 0
****PURCHASE COST AT $ 6.04 /BUSHEL****
0 0 0
****PURCHASE COST AT $ 6.83 /BUSHEL****
0 0 0

PRESS ENTER TO CONTINUE ?

By re-running the program a number of times with

different combinations of hedging, forward contracting, and

cash sales, a marketing strategy which is acceptable from both

income and risk perspectives can be determined. The

microcomputer simplifies the calculations and greatly reduces

the amount of time required to perform them.



PROGRAM LISTING

The program as it appears in this publication will work

without modification on Radio Shack Model I, II, and III

microcomputers and the IBM Personal Computer. Minor

modifications in BASIC commands and changes in screen format

may be necessary to run the program on other brands and types

of microcomputers. For example to run the program on an Apple

II+ machine, lines 100, 300, 470, 910, and 1090 should be

changed from CLS to HOME.








100 CLS
110 PRINT "UNIVERSITY OF FLORIDA"
120 PRINT "GRAIN MARKETING STRATEGY PROGRAM"
130 PRINT
140 INPUT "TOTAL PRODUCTION COST ($/ACRE) ";PC
150 INPUT "CURRENT FUTURES PRICE ($/BU) ";FP
160 INPUT "EXPECTED BASIS ($/BU) ";BS
170 INPUT "BROKERAGE FEE ($/BU) ";BF
180 PRINT "CURRENT FORWARD CONTRACT "
190 INPUT "PRICE ($/BU) ";CP
200 PRINT "EXPECTED CASH PRICE AT "
210 INPUT "HARVEST ($/BU) ";HP
220 INPUT "NUMBER OF ACRES PLANTED ";AP
230 INPUT "EXPECTED YIELD (BU/ACRE) ";YD
240 PRINT
250 INPUT "ARE THESE NUMBERS OK? (Y/N) ";Y$
260 IF Y$="Y" THEN GOTO 300
270 IF Y$="N" THEN GOTO 100
280 PRINT "ONLY Y OR N WILL WORK. TRY AGAIN."
290 GOTO 240
300 CLS
310 PRINT "CHOOSE YOUR MARKETING STRATEGY"
320 PRINT
330 LET TB=AP*YD
340 PRINT "YOU EXPECT TO HARVEST ";TB;" BUSHELS"
350 PRINT
360 PRINT "HOW MANY BUSHELS WILL YOU:"
370 INPUT "HEDGE ";NH
380 INPUT "FORWARD CONTRACT ";NF
390 PRINT
400 INPUT "WANT TO CHANGE ANYTHING? (Y/N) ";Y$
410 IF Y$="Y" THEN GOTO 300
420 IF Y$="N" THEN GOTO 450
430 PRINT "ONLY Y OR N WORKS. TRY AGAIN."
440 GOTO 390
450 FOR NN=1 TO 2
460 IF NN=2 AND NF+NH=0 THEN GOTO 900
470 CLS
480 PRINT "PRODUCTION COST ($/ACRE) ";PC
490 PRINT "FUTURES PRICE ($/BU) ";FP
500 PRINT "BASIS ($/BU) ";BS
510 PRINT "FORWARD CONTRACT PRICE ($/BU) ";CP
520 PRINT "TOTAL EXPECTED YIELD (BU) ";TB
530 PRINT "BU. HEDGED:";NH;" CONTRACTED:";NF
540 IF NN=1 THEN PRINT "**** RETURNS OVER PRODUCTION COST ****"
550 IF NN=2 THEN PRINT "100% CASH SALE AT HARVEST WOULD BE..."
560 LET YY=INT(YD*.15+.5)
570 LET LY=YD-YY
580 LET HY=YD+YY
590 LET G1=LY*AP
600 LET G2=YD*AP
610 LET G3=HY*AP
620 PRINT TAB(16);"YIELD"
630 PRINT "PRICE";TAB(11);LY;TAB(22);YD;TAB(32);HY
640 LET PP=INT(.15*HP*100+.5)/100
650 LET P(1)=HP-2*PP









660 LET P(2)=HP-PP
670 LET P(3)=HP
680 LET P(4)=HP+PP
690 LET P(5)=HP+2*PP
700 LET FF=CP*NF
710 LET CZ=PC*AP
720 FOR N=1 TO 5
730 LET MR=(FP-P(N)-BS-BF)*NH
740 LET R1=MR+FF+(G1-NF)*P(N)-CZ
750 R1$="SAME"
760 IF P(N)*G1-CZ>R1 THEN R1$="BETTER"
770 IF P(N)*G1-CZ 780 LET R2=MR+FF+(G2-NF)*P(N)-CZ
790 R2$="SAME"
800 IF P(N)*G2-CZ>R2 THEN R2$="BETTER"
810 IF P(N)*G2-CZ 820 LET R3=MR+FF+(G3-NF)*P(N)-CZ
830 R3$="SAME"
840 IF P(N)*G3-CZ>R3 THEN R3$="BETTER"
850 IF P(N)*G3-CZ 860 IF NN=1 THEN PRINT P(N);TAB(10);R1;TAB21)1;R2;TAB(32);R3
870 IF NN=2 THEN PRINT P(N);TAB(10);R1$;TAB(21);R2$;TAB(32);R3$
880 NEXT N
890 INPUT "PRESS ENTER TO CONTINUE ";Y$
900 NEXT NN
910 CLS
920 PRINT
930 PRINT TAB(20);"YIELD"
940 PRINT TAB(10);LY;TAB(21);YD;TAB(32);HY
950 PRINT "--- BUSHELS YOU NEED TO PURCHASE ----"
960 LET S1=(NH+NF)-G1:IF S1<0 THEN S1=0
970 LET S2=(NH+NF)-G2:IF S2<0 THEN S2=0
980 LET S3=(NH+NF)-G3:IF S3<0 THEN S3=0
990 PRINT TAB(10);S1;TAB(21);S2;TAB(32);S3
1000 FOR N=1 TO 5
1010 PRINT "****PURCHASE COST AT $";P(N);"/BUSHEL****"
1020 LET V1=INT(S1*P(N)*100+.5)/100
1030 LET V2=INT(S2*P(N)*100+.5)/100
1040 LET V3=INT(S3*P(N)*100+.5)/100
1050 PRINT TAB(10);V1;TAB(21);V2;TAB(32);V3
1060 NEXT N
1070 PRINT
1080 INPUT "PRESS ENTER TO CONTINUE ";Y$
1090 CLS
1100 PRINT:PRINT:PRINT:PRINT
1110 INPUT "WANT ANOTHER STRATEGY? (Y/N) ";Y$
1120 IF Y$="Y" THEN GOTO 300
1130 IF Y$="N" THEN GOTO 1160
1140 PRINT "ONLY Y OR N WORKS. TRY AGAIN."
1150 GOTO 1110
1160 PRINT "END OF PROGRAM"
1170 END





































































This public document was promulgated at a cost of $236.20, or 23.6 cents per copy, to inform farmers of a microcom-
puter marketing decision aid. 6-1M-83


COOPERATIVE EXTENSION SERVICE, UNIVERSITY OF FLORIDA, INSTITUTE OF FOOD AND AGRICULTURAL
SCIENCES, K. R. Tefertller, director, In cooperation with the United States Department of Agriculture, publishes this Infor-
matlon to further the purpose of the May 8 and June 30, 1914 Acts of Congress;and Is authorized to provide research, educa-
tlonal Information and other services only to Individuals and institutions that function without regard to race, color, sex or
national origin. Single copies of Extension publications (excluding 4-H and Youth publications) are available free to Florida
residents from County Extension Offices. Information on bulk rates or copies for out-of-state purchasers Is available from
C. M. Hinton, Publications Distribution Center, IFAS Building 664, University of Florida, Galnesville, Florida 32611. Before publicizing this
publication, editors should contact this address to determine availability.




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