By CME Group - Thu 07 Feb 2013 11:46:34 CT
Related Keywords: Agriculture
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U.S. corn and wheat supplies later this year will be larger than previously forecast, while soybean stockpiles are likely to be smaller, according to a Reuters survey of analysts ahead of an Agriculture Department crop update.
Based the surveys, nationwide corn inventories at the close of the 2012-13 marketing year August 31 are expected to total 618 million bushels, up 2.7% from 602 million bushels the USDA estimated in a January report. So-called ending stocks of corn would still be the lowest in 17 years.
Estimated wheat ending stocks for 2012-13 are expected to be increased about 1.5% to 727 million bushels from 716 million bushels previously, while estimated soybean ending stocks are expected to be reduced 4.4% to 129 million bushels from 135 million bushels.
The USDA is scheduled to release updated Supply and Demand estimates at 11 a.m. Central time February 8.
Two Chicago-based grain industry analysts – Kyle Schrad of INTL FCStone and Jerrod Kitt of Linn Group - will discuss their outlooks for the USDA reports during a live webcast hosted by CME Group later today.
Well I’ve had a stab at this, but bearing in mind I only studied mathematics up to age 16 (and that was more years ago than I care to remember) it still needs some work. These are my thoughts on how you could deal with decreasing excess.
If we used 3x margin cover at (say) 60 DTE and reduced this to 1x cover at 1 DTE in a straight line then cover at 30 DTE would be 2x and the average margin cover would be (3+1)/2 = 2. There’s too much risk here – cover at 30 DTE needs to be considerably more than 50% of cover at 60 DTE, reducing gradually at first, and more quickly as we get closer to expiry in a logarithmic curve.
This screenshot has the DTE in column A (you’re smart people, you managed to work that out), and column B has this formula: =LOG($A3,$I$1)+1
There is a variable in cell i1. We can put any number in here and it will reduce the cover from x DTE down to 1x cover at 1 DTE. A variable of 8 gives approx. 3x cover at 60 DTE. A variable of 6 will give 3x cover at 40 DTE.
The average margin required at 60 DTE (if we use base 8 as the variable) is 2.51x (cell B64).
This is where I’ve hit a mental wall. I can’t find a formula to calculate the average cover for a given DTE number. I’ve taken the cowards way out and produced a table for some sample numbers simply by deleting some cells. You could use these figures to calculate the ROI, but you’d have to punch them in manually.
In order to accurately assess the effect of decreasing margin on the ROI I think you’d have to plug PC-SPAN into the formula. You could probably find a log curve that approximates to it, but that’s for another day.
Hope this helps,
Sorry, I'm not allowed to upload a screenshot because I'm new here. This is the spreadsheet if you want to download it.