Test Your Grain Marketing I.Q.

By Betsy Jensen,
NCTC Instructor

Let’s see what you remember from all those grain marketing meetings you attended this winter.  Like every quiz you’ve ever taken, select the best answer.  Answer key is below.

1. Which of the following USDA reports is released once a month?

a. Crop Progress
b.   Supply/Demand
c.   Stocks and Acreage
d.   Export sales

2. If you sell a call option:

a. You have limited risk
b. You are “buying” the market, in a round-about way
c. You have unlimited profit potential
d. You are subject to margin calls

3. A stop loss order will:

a. Become a market order when the price is hit
b. Allow you to minimize your losses
c. Allow you to take the profits when they are available
d. Not have your account number on the trade, for privacy

4. A “good-til-canceled” order:

a.   Will remain in effect for 1 month
b.   Will remain in effect until the end of the week
c.   Will remain in effect until you cancel
d.   Cannot be used in many commodity markets

5.   Basis is the difference between:

a.   Put and call option premiums
b.   Your cash and futures prices
c. Protein discounts
d. Different future contracts

6. A futures fix contract is also called:

a. Hedge to Arrive
b.   Minimum Price
c.   Maximum Price
d.   Future Delivery Commitment

7.   A farmer with unpriced grain in the bin is considered:

a. Neutral, since the crop has not been priced
b. Long
c. Short
d. Broke

8. It’s possible to use the futures market instead of the cash market as a guide to sell cash grain because:

a. Futures are regulated by the exchange
b. Cash and futures prices move almost the same amount
c.   Cash and futures prices move in opposite directions
d.   Futures don’t trade more than four months in advance

9. Call and put options:

a.   Are separate, unique contracts
b.   Can offset each other
c.   Have unlimited risk
d.   Have limited reward

10.  When the nearby month is priced higher than the deferred month (ie, July is higher than November) the market:

a.   Is inverted
b.   Has a full carry
c.   Is encouraging you to store
d.   Is out of sync

Bonus question: Which among the following countries produced the most wheat during the 2003/2004 crop year?

a.   India
b.   United States
c.   Russia
d.   Australia

Marketing I.Q. Answers

1) B.  The USDA Supply/Demand report is released once a month, typically around the 10th. This report contains world production and use, and ending stock estimates.

2)   D.  If you sell a call option you are subject to margin calls.  Selling options is new to many farmers, and if you got this question wrong, it means you are not yet ready to sell options. Make sure to do your homework before using any unfamiliar marketing tool.

3)   A.   A stop loss order will become a market order when the price is hit. Many farmers believe stop loss orders will minimize your losses, but that doesn’t always work.  If you place a stop loss order to sell soybeans at 10 cents below the closing price, and the market opens down 30, you are filled at 30 lower, not 10 lower.  As soon as your price is hit, the order becomes a market order and you get filled wherever the market happens to be trading. Most of the time these orders do minimize your losses, but they can backfire.

4)   C.   A good-til-canceled order will remain in effect until you cancel the order. This is one of the best ways to sell cash grain since it allows to take advantage of higher prices, even if you’re not able to watch the markets.

5)   B.   Basis is the difference between your cash price and futures prices. If Minneapolis wheat futures are trading at $4.00, and your local cash price is $3.80, your basis is 20 under.  Basis reflects the cost of shipping and handling the grain, and to some extent local demand.

6)   A.   A futures fix contract is also called hedge to arrive.  The HTA term got a bad reputation when the contracts were misused back in the mid 1990’s, but they’re great contracts to use, as long as you don’t sell four years worth of grain at one time.

7) B.   A farmer with unpriced grain in the bin is considered long. The term long means you own a commodity.

8) B.   It’s possible to use the futures market instead of the cash market as a guide to sell cash grain, because cash and futures move almost the same amount. They won’t move penny for penny because the basis changes, but it will cover most of the price movement.

9) A.  Call and put options are separate, unique contracts.  You do not sell a put to offset a call. You can buy and sell puts, and you can buy and sell calls.  They each have their own premiums.

10)  A.   When the nearby month is priced higher than the deferred month, the market is inverted.  This typically happens when there is a shortage of grain, and the market is trying to encourage you to sell.  If you hold your grain, you’ll get less money in the future. 

Bonus question: A. India has consistently produced the most wheat among all those countries for several years. The U.S. has been close to topping India’s production, but we haven’t done that since 1998. There are so many countries in the world that buy, sell, and thus influence the grain markets, yet we still tend to concentrate on our own backyard. It’s important to keep the world perspective in mind.

Your Marketing I.Q. Rating

Tally your score giving one point for every right answer, and an additional point for getting the bonus question right.

Perfect score: Wow – have you thought about becoming a professional grain marketing consultant?

8-9: Impressive. You’re in tune with the markets and know your stuff. Keep at it!

6-7: Above average, but you can do better

3-5: Not bad, but still lots to learn

1-2: It’s obvious you need to put more time into improving your grain marketing knowledge

Zero: You still have grain left in the bin from 1996, don’t you?