June 01, 2003
by Emily Buckley
Most people have no understanding of the complex mix of mathematics, risk management and markets that go into trading commodities. For those wanting to
learn, Andrew McKenzie, assistant professor of ag economics at the University of Arkansas, Fayetteville, Arkansas, U.S., has developed a new program to help teach how grain moves through the market.
McKenzie and his research assistant Steven Nichols have created "Basis Trader," which is essentially a computer game that students use to learn about the trials and triumphs of grain marketing. The game looks at what happens when a product, such as corn, arrives at a grain elevator, which has the basic task of storing huge quantities of products, then picking the best time to sell those products. Elevators achieve this by using futures prices for delivery several months in the future, and base the selling decisions on past performances in the market.
McKenzie’s training game contains real historical data from around the country, and the player (or student) becomes a grain elevator operator who must make decisions about storing and selling grain based on the futures market and past years’ prices.
Just as a real grain company would hedge its risks on the futures market, the Basis Trader game also allows its user to minimize risk while still making a profit from the crops they sell. "The game teaches hedging and helps people see how it helps to reduce risk," McKenzie explained. It teaches the art and science of predicting changes in commodity markets and develops grain merchandising skills, he said.
"The main focus of the program is risk management as opposed to speculating and price forecasting," said McKenzie, who has been using Basis trader for two years in his classes. He is working on a third and final version of the program, which should be available to a wider audience within a year.