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Terminology used to designate when an option strike price is at the same level as the underlying futures. Base Futures In regards to a minimum price contract, the futures month and price the farmer is "hooked" to and will receive the increase if futures prices move higher. Basis The difference between the local cash price of grain and the futures price. The futures are always used as a base and the cash price is quoted as being under or over the futures price. For example: If your local cash price for wheat is $4.00 and the spot futures price for wheat is $4.15, then your basis would be -$.15 or $.15 below the futures. Grains are produced at one time during the year, but are used continuously during the rest of the year. Therefore, storage is essential. Basis for grains will typically be widest at harvest time, then narrow as the crop year progresses. A wide basis encourages storage and contributes support to current prices, thus reducing current market supplies. But, at the same time, has a negative impact on prices at a later date by increasing market supplies. A narrow basis has just the opposite effect. Basis Contract A contract that locks the farmer into a basis which he can then price his grain later at the prevailing futures price less the basis. Title of the grain passes to the elevator. Bear Market The perception or reality of a general decline (or downward trend) in cash or futures prices. Beneficial Interest The ability to sell, pass title to, or move a commodity. Bull Market The perception or reality of a general incline (or upward trend) in cash or futures prices. CALL Option An option that gives the buyer the right, but not the obligation, to assume a long futures position at a specified price any time during the life of the option. Carry Spread When the nearby futures month is trading at a lower price than a distant futures contract price. Deferred Payment Delaying the payment of the sale of grain until a later date when the price has already been established. Deferred Price Contract A contract which transfers title of the grain from the farmer to the elevator, with the price to be determined later. These may also be referred to as Delayed Payment (or DP) contracts. An elevator may offer these when there is a new crop coming on that is placing a demand on their storage space. The Delayed Price contract gives them option to sell the grain and make more room in their elevator or warehouse for new crop. The elevator (purchaser) is giving you the opportunity to continue the grain without the cost of storage. Deficiency Payment A payment farmers (enrolled in the program) receive from the government if the national average selling price of grain over a period of time does not meet a pre-determined target price. Downside Risk The risk that prices may move lower while the producer retains ownership of grain. Exercising Options A procedure initiated by the buyer of an option in which he takes ownership of the underlying futures contract at the specified option strike price. The seller is obligated to take the offsetting transaction. Floor Selling grain at an estnblished price thereby eliminating any risk of lower prices. Form 666 An ASCS form used to claim an LDP payment on bushels in which a producer still has beneficial interest in. Form 709 A form to be filed with your CCC office prior to delivery or harvest of a commodity in which beneficial interest is lost as the commodity is delivered. Forward Contract A contract for the sale of cash grain at a specified price for future delivery. Forward Minimum Price Contract A minimum price contract which establishes a price on the farmer's grain prior to delivery (Forward Contract).
Futures Contract A legally binding commitment to make or take delivery of a standardized quantity and quality or a commodity at a future date. The contract is executed at a price agreed upon in the trading pit of a commodity exchange at the time the contract is executed. Most futures contracts do not result in the physical delivery of the commodity. Instead, an offsetting transaction occurs prior to delivery and any price differences settled in cash. Futures Exchange
(Market) Centralized, regulated markets where an actual commodity is not physically traded. Instead, futures contracts are bought and sold. It takes both a buyer and a seller to make a trade in the commodity market. Hedge The practice of offsetting a cash transaction with the buying or selling of a futures contract in order to limit price risk. Hedge-to-Arrive Contract A contract in which the farmer initially sets a futures price with the basis to be fixed later; cash price is determined by the prevailing basis at the time of pricing. In-the-Money Terminology used to designate that an option has value in relation to the current futures price. Inverted Spread When a nearby futures contract price is trading higher than a distant futures contract price. Loan Deficiency Payment (LDP) The payment that the government will pay to a producer to not take a loan out on a specific commodity. The current limit of LDP & MLG payments per producer is $150,000. Long Futures The result of buying a futures contract without having an offsetting sell. Margin Money required to be held on account for the purpose of insuring against losses on open futures contracts. Marketing Alternatives A variety of methods farmers can choose from to sell grain. Alternatives differ in method of pricing, delivery flexibility and terms of payment. Marketing Loan Gain (MLG) The gain received on a CCC loan taking the PCP from the accrued interest and principal due on a CCC loan. Marketing Plan A procedure outlining the producer's goals and intent for selling grain and/or livestock. Minimum Price Contract A contract that establishes a price on the farmer's grain while still enabling him to participate in higher prices if they occur. Multi-Year Contract A contract for the sale of cash grain at harvest for more than one year at a specified price. Non-Delivery The inability to deliver grain that has been sold due to crop failure. Option A legally binding contract that gives the option buyer the right, but not the obligation, to buy or sell the underlying commodity under specific conditions in exchange for the payment of a premium. It is the buyer's decision whether to exercise that right; only the seller of the option is obligated to perform. Option Premium The price of an option which is paid by the buyer and received by the seller. Option premiums are determined by competitive bids and offers on the floor of the commedity exchange and are based on the amount of time available in the option and the value of the strike price in relation to the current futures price. Out-of-the-Monev Terminology used to designate that an option has no value in relation to the current futures price. Posted County Price (PCP) The price the USDA/CCC uses to base any loan redemption or LDP payment on. It is calculated daily on all grains except sunflowers which are fixed for the next week each Friday morning. Production Costs The costs associated with planting, growing and harvesting a crop. PUT Option An option that gives the buyer the right, but not the obligation, to assume a short futures position at a specified price any time during the life of the option. Rallv A fast and large upward price move of the futures markets. Roll Forward To transfer the obligation for delivery of grain from one crop year to the next. Producer's contracted price is adjusted by the spread difference between new crop futures at the time of the transfer. Scaling Orders Orders entered in the market that offers to sell a portion of the farmers grain at graduated price levels. Short Futures The result of selling a futures contract without having an offsetting purchase. Speculation The attempt to anticipate commodity price changes and to profit through the purchase or sale of either the commodity futures contract or the physical commodity. Spread The difference between the price of two futures contract months. Strike Price The price at which the holder of an option may choose to exercise his right to the underlying futures contract. Target Contract An offer to sell cash grain at a specified price above the current price level. If the cash price reaches this level, grain is sold as a Cash Sale or Forward Contract, depending upon delivery. Target Price The cash price the farmer wants to receive in order to reach his profit objectives. Volatility The stability of the market and its likelihood for rapid and extreme price moves. Yields The amount of bushels (or pounds) of a crop produced per acre. COMMODITY
EXCHANGES CHICAGO BOARD OF TRADE Trading Hours: 9:30 - 1:15 Central Time
CHICAGO MERCHANTILE EXCHANGE Trading Hours: 9:05 - 1:00 Central Time
Ag.
Commodities Traded: Feeder Cattle, Live
Hogs, Live Cattle, Pork Bellies, Fresh
Broilers, Eggs, Potatoes. KANSAS CITY BOARD OF TRADE Trading Hours: 9:30 - 1:15 Central Time
MID AMERICA COMMODITY EXCHANGE Offers
“mini - contracts” for Corn, Oats, Soybeans, Wheat, Live Hogs, Live Cattle.
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