KEY AGBM $102$

Hedging HW

Please read all instructions before beginning each problem. Be sure to show what equations you are using and$/$or your work. We will grade this for partial credit.

You are a farmer in south$-$central Pennsylvania producing winter wheat for the cash grain market. You are planting $100$ acres of winter wheat in the fall of $2023.$ You expect a yield of at least $65$ bushels per acre. You are wondering whether you should hedge your output.

The table lists the wheat basis in your area based on recent history.

You plan to sell your wheat in July of $2024.$

The current futures price on the CMC for July is $$5\mathrm{.}00$ per bushel.

$\backslash$table$[[\backslash$table$[[$South$-$central PA Wheat basis$],[($cents per bushel$)]]],[$Month$,$Average$],[$JAN$,\mathrm{.}43],[$FEB$,\mathrm{.}41],[$MAR$,40],[$APR$,\mathrm{.}39],[$MAY$,\mathrm{.}36],[$JUN$,\mathrm{.}22],[$JUL$,\mathrm{.}16],[$AUG$,\mathrm{.}19],[$SEP$,\mathrm{.}25],[$OCT$,\mathrm{.}30],[$NOV$,\mathrm{.}34],[$DEC$,\mathrm{.}39],[$YEAR avg,$\mathrm{.}32]]$

a$.$ If the CMC price stays the same, what price will you expect to receive in July selling locally per bushel? What about for your total harvest sold locally?

b$.$ You speculate that next July's harvest might be higher than expected, causing prices to drop at July harvest time. So you want to protect yourself by locking in the July futures price with the intention of completing a price hedge for your crop. Briefly explain the step$($s$)$ you would take in the fall $($including the values of any sales$/$purchases$,$ amounts, and the time it occurs$).$

It is July $2024$ and you actually had drought that caused a bad crop. You just harvested $5,500$ bushels in July, $2024.$ You waited until now to buy an offsetting futures contract and the CMC July futures costs $$5\mathrm{.}50$ per bushel. Your local mill paying $$5\mathrm{.}70$ per bushel.

c$.$ If you decided to hedge in the fall, explain what step$($s$)$ you are now completing $($including the values of any sales$/$purchases$,$ amounts, and the time it occurs$).$

d$.$ Calculate how much money you made$/$loss from your hedge per bushel. Show any calculations Remember: You used a broker, commission is $1$ cent per bushel to buy or sell

e$.$ Regardless of deciding to hedge or not, you must sell your harvest. How much would you make from selling your wheat locally to the mill?

Remember: You are selling directly to the mill, so you don't have to pay commission.

f$.$ Considering both your local sale and hedge, how much money did you make$/$lose this season $($what is your net$)?$ How would it compare to if had you never hedged? Show your calculations.