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In: Economics

You are a farmer in south-central Pennsylvania producing wheat for the cash grain market. You have...

You are a farmer in south-central Pennsylvania producing wheat for the cash grain market. You have planted 100 acres of winter wheat in the fall of 2016 and you are wondering whether you should hedge your output. You expect a yield of at least 50 bushels per acre. Below is a table listing the range of the wheat basis in your area based on recent history.

South-Central PA Wheat Basis (Cents per Bushel)
Month Average
January 43
February 41
March 40
April 39
May 36
June 22
July 16
August 19
September 25
October 30
November 34
December 39
Year 32

You are a farmer in south-central Pennsylvania producing wheat for the cash grain market. You have planted 100 acres of winter wheat in the fall of 2016 and you are wondering whether you should hedge your output. You expect a yield of at least 50 bushels per acre. Below is a table listing the range of the wheat basis in your area based on recent history.

1. You are a farmer in south-central Pennsylvania producing wheat for the cash grain market. You have planted 100 acres of winter wheat in the fall of 2016 and you are wondering whether you should hedge your output. You expect a yield of at least 50 bushels per acre. Below is a table listing the range of the wheat basis in your area based on recent history.

2. If you want to use the futures market to hedge what would you do? Explain in detail what you would do and when.

3. It is now July 15 2017. The price of the July contract in Chicago is $5.50. The price offered by your local flour mill is $5.70. Your actual production is 5,500 bushels. You are ready to harvest and sell your wheat. Please explain exactly what you will do? Assuming a commission of 1 cent per bushel calculate how your hedge worked out? Please explain the result and show your work.

4. It is now July 15 2017. The price of the July contract in Chicago is $5.50. The price offered by your local flour mill is $5.70. Your actual production is 5,500 bushels. You are ready to harvest and sell your wheat. Please explain exactly what you will do? Assuming a commission of 1 cent per bushel calculate how your hedge worked out? Please explain the result and show your work.

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