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Grain marketing can be one of the most important decisions you make on your
farm. It is also one of the most frustrating decisions you will have to make,
because grain marketing can be confusing. You are dealing with unfamiliar
terminology. Many of you have had some exposure at grain marketing meetings. All
of us are exposed to marketing advice in magazines, mailers, radio, and the
Internet. New marketing tools are continually being developed, however, until we
have a thorough understanding of the terms and phrases, it’s difficult to
thoroughly understand the marketing advice, and to make a sound decision. The
grain industry is no different than any other industry in that the terms and
phrases are often difficult to understand unless you are directly involved with
that particular business.
As our world economy and politics become more volatile, the industry is
exposed to factors, which are out of our control. It has resulted in a situation
in which you must become more aware of true marketing trends and be able to sort
out short-term reactions caused by false weather scares, and irrelevant news.
Education is the key to understanding. I have put together some of the common
terms and there definitions so that you can become familiar with them. It will
be easier to learn and understand marketing advice from all sources if you
possess this tool.
Basis
The difference between the cash or spot price and the price of the nearby
futures
Contract. Sometimes the word basis is used synonymously with “cash commodity” as
in the phrases “long the basis” or “short the basis” meaning that one has bought
or sold the cash commodity.
Bear
One who anticipates the market to go lower. Term can be used to label a
market. (Bearish)
Bid
An offer to buy a specific quantity of a commodity at a stated price. Meaning
wanting to purchase.
Broker
A person paid a fee or commission for acting as an agent in making contracts
or sales; (2) Floor broker – in commodities futures trading, a person who
actually executes orders on the trading floor of the exchange; (3) Accounting
Executive – the person who deals with customers and their orders in commission
house offices.
Bull
One who anticipates the market to go higher. Term can be used to label a
market. (Bullish)
Buy or Sell on Close or Opening
To buy or sell at the end or the beginning of the trading session at a price
within the closing or opening range of prices.
Buying Hedge (or Long Hedge)
Buying futures contracts to protect against possible increased cost of
commodities which will be needed in the future.
Carrying Charges
(1) Those costs incurred in warehousing the physical commodity, generally
including interest, insurance, and storage; (2) Full Carrying Charge Market – a
situation in the futures market when the price difference between delivery
months reflects the full costs of interest, insurance, and storage.
Carryover
That part of current supplies of a commodity comprised of stocks from
previous production/marketing seasons.
Cash Commodity
Actual stocks of a commodity as distinguished from futures contracts; goods
available for immediate delivery within a specified period following sale; or a
commodity bought or sold with an agreement for delivery at a specified future
date.
Charting
The use of graphs and charts in the technical analysis of futures to plot
trends of price movements, average movements of price, and volume and open
interest.
Clearing House
An agency connected with commodity exchanges through which all futures
contracts are made, offset, or fulfilled through delivery of the actual
commodity, and through which financial settlement is made; often is a fully
chartered separate corporation, rather than a division of the exchange proper.
Closing Range
A range of closely related prices at which transactions took place at the
closing of the market; buying and selling orders at the closing might have been
filled at any point within such a range.
Commodities
Usually the raw products of the ground. Lately new items of trade include,
mortgage interest rates, currencies, heating and industrial fuel oil.
Commodity Credit Corporation
A government owned corporation established in 1933 to assist US agriculture.
The major operations of the CCC are price support programs in which it purchases
excess supplies of commodities, and assistance in foreign exports of
agricultural commodities.
Cover
To offset a previous futures transaction with an equal and opposite
transaction. Short-Covering is a purchase of futures contracts to cover an
earlier sale of an equal number of futures contracts at the same delivery month;
Liquidation is the sale of futures contracts to offset the obligation to take
delivery on an equal number of futures contracts at the same delivery month
purchased earlier.
Daily Volume
Totals of contracts traded each day. Later these trades will be off-set with
either purchases or sales.
Day Traders
Commodity traders, generally members of the exchange active on the trading
floor who take positions in commodities and then liquidate them prior to the
close of the same trading day.
Deferred Delivery
(1) Synonymous with forward contracting; (2) The most distant months in which
futures trading is taking place, as distinguished from the nearby futures
delivery months.
Delivery Month
A calendar month during which a futures contract matures and becomes
deliverable.
Discount
(1) A downward adjustment in price allowed for delivery of stocks of a
commodity of lesser than deliverable grade against a futures contract; (2)
Sometimes used to refer to the price differences between futures of different
delivery months, as in phrase “July at a discount to May” indicating that the
price of the July futures is lower than that of the May.
Discretionary Account
An arrangement by which the holder of the account gives written power of
attorney to another, often his broker, to make buying and selling decisions
without notification to the holder; often referred to as the “Managed account,”
or “controlled account”.
F.O.B.
Free on Board; indicates that all delivery, inspection, and elevation or
loading costs involved in putting commodities on board a carrier have been paid.
First Notice Day
First day on which notices of intention to deliver cash commodities against
futures contracts can be presented by sellers and received by buyers through the
exchange clearing house.
Forward Contracting
A cash transaction common in many industries, including commodity
merchandising, in which the buyer and seller agree upon delivery of a specified
quality and quantity of goods at a specific futures date. A specific price may
be agreed upon in advance, or there may be an agreement that the price will be
determined at the time of delivery on the basis of either the prevailing local
price or a futures price.
Fundamental Analysis
An approach to analysis of futures markets and commodity futures price trends
which examines the underlying factors which will affect the supply and demand of
the commodity being traded in futures contracts. See also Technical Analysis.
Hedger
One who “off-sets” his cash commodity with an equal sale or purchase of a
futures contract.
Inverted Market
Futures market in which the nearer months are selling at premiums over the
more distant months; characteristically, a market in which supplies are
currently in shortage.
Last Trading Day
Day on which trading ceases for the maturing (current) delivery month.
Life of Contract
Period between the beginning of trading in a particular futures and the
expiration of trading in the delivery month.
Limit Order
An order in which the customer sets a limit on either price or time of
execution, or both, as contracted with a “market order,” which implies that the
order should be filled at the most favorable price as soon as possible.
Long
One who has bought a cash commodity or a commodity futures contract, in
contrast to a short, who has sold a cash commodity or futures contract.
Margin
(1) An amount of money deposited by both buyers and sellers of futures
contracts to insure performance against the contract, is to deliver or trade
delivery of the commodity (not an equity or down payment for the goods
represented by the futures contract);
(2) Profit margin – the difference between the price which one pays for goods
and the price at which the goods or products of them are sold.
Margin Call
A call from a brokerage firm to a customer to bring margin deposits back up
to minimum levels required by exchange regulations; similarly, a request by the
clearing house to a clearing member firm to make additional deposits to bring
clearing margins back to minimum levels required by the clearing house rules.
Market Order
An order to buy or sell futures contracts which is to be filled at the best
possible price and as soon as possible. In contrast to a limit order, which may
specify requirements for price or time or execution.
Nominal Price
Declared price for a futures month sometimes used in place of a closing price
when no recent trading has taken place in that particular delivery month;
usually an average of the bid and asked price.
Offer
An indication of willingness to sell at a given price; opposite of bid.
Offset
The liquidation of a purchase of futures through the sale of an equal number
of contracts of the same delivery month, or the covering of a short sale of
futures contracts through the purchase of an equal number of contracts of the
same delivery month. Either action transfers the obligation to make delivery of
the actual commodity to other persons.
Open Interest
The total number of futures contracts of a given commodity which have not yet
been offset by opposite futures transactions nor fulfilled by delivery of the
actual commodity; the total number of open transactions, with each transaction
having a buyer and a seller.
Opening Range
Range of closely related prices at which transactions took place at the
opening of the market; buying and selling orders at the opening might be filled
at any point within such a range.
Original Margin
Term applied to the initial deposit of margin money required of clearing
member firms by clearing house rules; parallel to the initial margin deposit
required of customers by exchange regulations.
Overbought
A technical opinion that the market price has risen too steeply and too fast
in relation to underlying fundamental factors.
Oversold
A technical opinion that the market price has declined too steeply and too
fast in relation to underlying fundamental factors.
Round Lot
A quantity of a commodity equal in size to the corresponding futures contract
for the commodity, as distinguished from a job lot, which may be larger or
smaller than the contract.
Scalper
A speculator on the trading floor of an exchange who buys and sells rapidly,
with small profits or losses, holding his positions for only a short time during
a trading session. Typically, a scalper will stand ready to buy at a fraction
below the last transaction price and sell at a fraction above, thus creating
market liquidity.
Selling Hedge (or Short Hedge)
Selling futures contracts to protect against possible decreased prices of
commodities which will be sold in the futures.
Settlement Price
The closing price, or a price within the range of closing prices, which is
used as the official price in determining net gains or losses at the close of
each trading session.
Short
One who has sold a cash commodity or a commodity futures contract, in
contrast to a long, who has bought a cash commodity of futures contract.
Speculator
One who attempts to anticipate commodity price changes and make profits
through the sale and/or purchase of commodity futures contracts. A speculator
with a forecast of advancing prices hopes to profit by buying futures contracts
and then liquidating his obligation to take delivery with a later sale of an
equal number of futures of the same delivery month or hopes to profit by selling
commodity futures contracts and then covering his obligation to deliver with a
later purchase of futures at a lower price,
Spread
The purchase of one futures delivery month against the sale of another
futures delivery month of the same commodity, the purchase of one delivery month
of one commodity against the sale of that same delivery month of a different
commodity, or the purchase of one commodity in one market against the sale of
that commodity in another market; to take advantage of any profit from
distortions from the normal price relationships that sometimes occur. The term
“spread” is also used to refer to the difference between the price of one
futures month and the price of another month of the same commodity.
Switch
Liquidation of a position in one delivery month of a commodity and
simultaneous initiation of a similar position in another delivery month of the
same commodity. When used by hedgers this tactic is referred to as “rolling
forward” the hedge.
Technical Analysis
An approach to analysis of futures markets and likely futures trends of
commodity prices which examine the technical factors of market activity.
Technicians normally examine patterns of price changes, rates of change, and
changes in volume of trading and open interest. This data is often charted to
show trends and formations which will in turn serve as indicators of likely
futures price movements.
Tender
The act on the part of the seller of futures contracts of giving notice to
the clearing house that he intends to deliver the physical commodity in
satisfaction of the futures contract. The clearing in turn passes along the
notice to oldest buyer of record in that delivery month of the commodity.
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