Grain and livestock marketing terminology can be confusing. Here are the top marketing terms you need to understand to fully comprehend what’s happening in the market and how you can use it to your advantage, according to Chip Flory, Farm Journal economist and host of “AgriTalk” and “AgriTalk After the Bell.”
Basis: Difference between the current cash price and the futures price of the same commodity. The price of the nearby futures contract month generally is used to calculate the basis. Example: $5.00 cash price – $5.50 futures price = –50¢ basis.
Call option: Option that gives the buyer the right, but not the obligation to purchase (go “long”) the underlying futures contract at the strike price on or before the expiration date. The call writer (seller) may be assigned a short position in the underlying futures if the buyer exercises the call.
Forward (cash) contract: Contract in which a seller agrees to deliver a cash commodity to a buyer sometime in the future. Forward contracts are privately negotiated.
Futures contract: A legally binding agreement made through a futures exchange to purchase or sell a commodity sometime in the future. Futures contracts are standardized according to the quality, quantity, delivery time and location for each commodity. The only variable is price.
Hedge: Can be either a noun or a verb. It describes the action or situation that puts you price-neutral; that is, you have locked in the price of something you have to sell or purchase and are thus unaffected by change in future prices. You do it by taking a futures position that is opposite your cash position.
In-the-money option: An option having intrinsic value. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract.
Long: Reflects a market position whereby you stand to gain if prices move higher. “Long the cash” means you’re exposed to the risk of lower prices on an actual crop. “Long the board” means you’re exposed to the risk of lower prices on a futures contract you have purchased.
Option: A contract that conveys the right but not the obligation to buy or sell a particular commodity at a certain price for a limited time.
Out-of-the-money option: An option with no intrinsic value. Example: a call where the strike price is above the current futures price.
Put option: An option that gives the option buyer the right but not the obligation to sell the underlying futures contract at the strike price on or before the expiration date. The buyer of a put has the right to acquire a short position in the underlying futures contract at the strike price until the option expires.
Selling hedge: Selling futures contracts to protect against possible declining prices of commodities that will be sold in the future. At the time the cash commodities are sold, the open futures position is closed by purchasing an equal number and type of futures contracts as those that were initially sold.
Short: Reflects a market position whereby you stand to gain if prices drop. “Short the cash” means you have already sold a growing or stored crop. You are “short the cash” on feed if you have future feed needs that you have not yet covered.
Spot: Usually refers to a cash market price for a physical commodity that is available for immediate delivery. Also called a spot commodity.
Spread: The price difference between two related markets or commodities. Usually refers to a simultaneous purchase of a contract and sale of another.
For more strategies on how to protect your profits, order Farm Journal’s Marketing Education Series. This guidebook and DVD by Chip Flory, will help you with your decision-making process. Visit shopfarmjournal.com/marketing