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Grain Marketing Terms File A2-05

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Grain Marketing Terms File A2-05 Ag Decision Maker extension.iastate.edu/agdm Grain Marketing Terms File A2-05 Actuals – The physical commodities that are being • Economic cost breakeven selling price – The traded. price needed to recover all costs including the Arbitrage – The simultaneous purchase of opportunity costs associated with producing the commodities in one market and the sale of commodity. commodities in the same or different market. Arbitrage is profiting from a discrepancy in prices. Broker – One who executes futures trading orders for customers. The broker may be an employee in a local Basis – The difference between the futures price for office of a brokerage firm, or a floor broker or pit a commodity and its cash price at a specific location. broker executing orders on the trading floor. The nearby futures delivery month is usually used. • Brokerage – The fee charged by brokerage firms • Basis risk – Risk of change or variation in the for the execution of a transaction. Also called basis. commission. This fee may vary from firm to firm. • Even basis – A condition that exists when the • Brokerage house – An organization that buys local cash price is equal to the futures price. and sells for the accounts of customers. Also • Over basis – A condition that exists when the called Commission House or Wire House. local cash price is greater than the futures price. Also called positive basis. Cash market – The market in which physical • Under basis – A condition that exists when the commodities are bought and sold. Refers not only to local cash price is less than the futures prices. elevator companies and processors buying products Also called negative basis. but also to the organized cash sales at commodity exchanges and over-the-counter cash trading. • Weakening basis – Basis movement over time that occurs when the cash price is declining Charting – A part of technical analysis for forecasting relative to the futures price. price movements which analyze past price behavior through the use of charts and graphs. • Strengthening basis – Basis movement over time that occurs when the cash price is rising • Bar chart – A graph showing the high, low, and relative to the futures price. settlement prices for each trading period over time. Breakeven selling price – The price a producer must • Moving average – An arithmetic average (often receive for a commodity in order to recover all of the closing prices) over a given period of time (e.g. costs associated with producing and with storing the five days). The period is constantly moving commodity. forward in time so the average reflects only the most recent prices. • Cash flow breakeven selling price – The price needed to recover the cash expenditures • Linearly weighted moving average – The associated with producing the commodity. more recent prices are given more weight in computing the average. • Accounting cost breakeven selling price – The price needed to recover all costs except the opportunity costs associated with producing the Coarse grains – Corn, barley, oats, grain sorghum, commodity. and rye. Millet is also included in the statistics of some foreign countries. These are generally considered feed grains. Reviewed May 2021 Page 2 Ag Decision Maker File A2-05, Grain Marketing Terms Commodity – Any physical product traded on a • Delayed payment contract – An agreement in futures exchange. A fungible product (each unit is which the price is established and the grain is the same). delivered but payment is postponed until later. Consignment – Grain shipped to a third party for sale It is typically used to shift taxable income into by the third party. the following year. • On consignment grain – Grain shipped to a • Forward contract – An agreement requiring broker for sale in the cash market. the producer to deliver a specific quantity and quality of grain to the elevator at a specified time and location for a previously agreed on Corner – To secure control of a commodity so that its price. price can be manipulated. • Hedge-to-arrive contract – An agreement where Delivery – The transfer of the physical commodity in a producer chooses a future contract month satisfaction of a futures contract. and establishes the futures price for grain they • Deliverable grades – Commodity grades that intend to sell. The basis is established later at can be delivered to satisfy a futures contract. the discretion of the producer. The producer’s • Delivery month – The month in which a futures price is the futures price less the basis. Hedge- contract matures and delivery may be made or to-arrive contracts can often be rolled forward contract settlement made. to another futures contract month. The elevator performs the hedging transaction. • Delivery notice – A notice of the intent to deliver or a request to receive delivery of • Minimum price contract – An agreement in a commodity under the terms of a futures which a minimum sale price is established. The contract. producer is guaranteed either the current cash price or the minimum sale price, whichever is • Delivery points – The locations at which greater. In exchange for the minimum price commodities may be delivered to satisfy a guarantee, the producer must pay a fee similar futures contract. in size to an option premium. • Quality premium – The additional payment an • Offer contracts – A producer signs a contract exchange specifies for delivery of a commodity with an elevator indicating their desire to sell of higher than required quality against a futures a specific number of bushels of grain any time contract. cash price reaches a designated price. • Tender – Delivery against a futures position. • Price-later (delayed price) contract – An agreement in which grain is delivered and legal Elevator cash contracts – Contracts for the purchase title passes to the elevator but price is established of grain, usually from producers. later at the discretion of the producer. The price • Basis contract – An agreement in which grain to the producer on any given day is the elevator is delivered and legal title passes to the elevator. cash price less a service charge. The agreement establishes the basis but not the futures price. The producer later selects the Exercise – Action taken when the buyer of a call day on which they wish to establish the futures (put) option converts the option to the purchase price. At that time, the producer will receive the (sale) of the underlying futures contract. futures price minus the previously agreed upon • Exercise price – The price (strike price) at basis. which an option can be exercised. • Expiration – The date on which an option can no longer be exercised. Ag Decision Maker File A2-05, Grain Marketing Terms Page 3 Exchange rate – The number of units of one • Pipeline stocks – The minimum quantity of currency that can be exchanged for one unit of a commodity needed to carry on the normal another currency. A decline (increase) in the value processing and marketing operations. Tends to of the US dollar reduces (increases) the price of US be relatively constant from year to year. commodities for foreign buyers. • Buffer carryover stocks – Carryover stocks in • Devaluation – An official reduction of the excess of pipeline stocks that are carried over exchange rate of a nation’s currency. for use in the next marketing year. Buffer stocks • Fixed exchange rate – The relative values of fluctuate substantially from year to year. currencies are established and maintained by government intervention. Futures contract – A contract traded on a futures exchange that calls for delivery of a standardized • Flexible exchange rate – The value of a amount and quality of a commodity during a specific country’s currency varies and is determined by month. The contract price (per unit of commodity) the supply and demand for the currencies. is established through competitive trading at the organized exchange. Exports – Domestically produced commodities that are sold abroad. • First notice day – The first day on which notice intentions can be made or received to deliver • Export tax – A fee paid on exports to the actual commodities against futures contracts. It government of the originating country. usually precedes the beginning of the delivery • Export subsidies – Special incentives such as period. cash payments, tax exemptions, preferential • Futures contract months – The delivery months exchange rates and special contracts extended in which futures contracts are traded. by governments to encourage increased foreign sales. • Futures premium – The amount that prices for one futures contract month exceed those of • Export license – A government document another futures contract month. authorizing exports of special goods in specific quantities to a particular destination. • Last trading day – The last day of trading in a particular futures or options contract month. Unsettled contracts at the end of the last trading Fundamentals – One of two major sets of factors day must be fulfilled by delivery of the physical in analyzing prices. Fundamentals are supply and product or closed through cash settlement demand factors that influence prices of commodities. procedures if the contract does not permit Technical analysis (chart patterns) is the other major delivery. set of factors affecting prices. • Life of contract – The time period during which • Marketing year – The twelve month period a specific contract month has been trading. during which a crop normally is marketed. For example, the marketing year for the current • Maturity – The period when a futures contract corn crop is from Sept. 1 of the current year can be settled by delivery of the actual to Aug. 31 of next year. The marketing year commodity or through cash settlement if that is begins at harvest and continues until just before an alternative to delivery. harvest of the following year. • Nearby delivery month – The futures contract • Carryover – The quantity of a commodity month closest to maturity. remaining at the end of marketing year. • Open contracts – Contracts that are • Free supply – The amount of grain available to outstanding.
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