Futures and Options Markets-Case study- Grain Merchandising
You are a merchant-in-training with The Scoular Company. You are doing rotations with several of their trading desk. In the first task, you are assigned to their Wheat Container Export Desk, charged with managing the trade of North American wheat to Asia demand centers. In the second task, you are assigned to Scoular’s Yellow Corn Rail Shuttle Desk charged with managing trade originating on the Union Pacific line into Mexico.
Task 1 – Wheat Container Export Desk:
It is May 1st and you just purchased 750,000 bushels of new crop Canadian Western Soft White Spring (CWSWS) Wheat delivered into Vancouver for Aug delivery at a price of $6.50/bu CAD. You would like to sell it quickly and reach out to your customer Ms. Li who is the procurement manager for Xiaomai Milling which operates 9 flour mills throughout mainland China. She has demand for 20,000 MT of CWSWS shipped in containers CFR Shanghai for Aug/September. Ms. Li would buy in her needs from you but feels prices will come down from now until August 1st. Thus, she would like to look at a basis purchase and is asking you to develop a strategy that will allow her to take advantage of flat price weakness over the next 3 months while limiting her exposure to upside moves. Ms. Li understands such strategy may have some upfront costs. Ms Li generally purchases all North American wheat in US dollars. Canadian suppliers sell wheat flat price in Canadian Dollars.
Due to the risk profile of selling wheat into China you would like to lock in at least $20/MT of margin x 20,000 MTs = $400,000 USD.
· How would hedge currency and flat price exposure on your forward Canadian Wheat Purchase, assuming sale is not confirmed?
· What basis price would you offer Ms. Li today?
· Present a pricing strategy that would allow Ms. Li take advantage of flat price depreciation of while limiting exposure to upside moves. What are the costs for Xiaomai Mills to incorporate the strategy you propose?
· If you cannot sell the CWSWS to Ms. Li and have to carry the forward contract long what are your risks? Explain the convergence concerns?
Task 2 – Yellow Corn Rail Shuttle Desk
After completing your rotation on the Wheat Container Export Desk you have been assigned to Scoular’s Yellow Corn Rail Shuttle Desk charged with managing trade originating on the Union Pacific line into Mexico. Your customer Mr. Juan from Maize Com operates a large feed mill in Torreon, Mexico and is looking to close on a yellow corn clock package to cover his needs for the ‘17/’18 crop year. A clock package consists of 1 shuttle train delivered per month Oct 2017 thru Sept 18. Maize Com would like to have one price for the whole package offered in Pesos per MT.
Each shuttle train consist of 100 rail cars loaded to 4000 bushels each = 400,000 bushels per month. You would like to make 10 cents per bushel on the trade. You would like net 10 cents per bushel on the trade = $40,000 per train x 12 months = $480,000. However, you also want consider ways to increase total revenue on the trade
· What flat price would you offer?
· How would you lock in the 10c margin at the time of trade through hedging/cash contracts?
o Corn Price
o Currency
o Fuel
What are some strategies that could be incorporated to increase potential trade margin?
