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SIMULATIONS

Harvest time

Harvest time

Understanding the operations of a wheat producer

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Harvest time simulation   SC_BDF3_US_V6

Scenario of the simulation

The Harvest time simulation is the follow up to the The price of wheat simulation.

At the start of the simulation, you own an account worth €100,000 in cash and 1,000 Bl de France shares.

As a SimTrader, your goal in this simulation is to maximize your trading gains.

In this simulation, you can send all types of orders to the market: market orders (MKT), limit orders (LMT), best limit orders (BL), stop orders (STP) and stop limit orders (STL).

The duration of the simulation is initially set to 10 minutes, which corresponds to a 24-hour trading day. Using the timeline, you can increase or decrease the simulation speed at any time.

Grading

Your grade for this simulation (100 points) takes into account the following elements:

  • Your trading performance (60 points): your relative performance, that is to say the difference between your gain/loss on your position with your intervention during the simulation and the gain/loss without your intervention (as if you haven't sent any order)

  • Your trading activity (25 points): the launching of the simulation (5 points), your determination to go to the end of the simulation (10 points) and the sending of at least one order to the market (10 points)

  • Your grade in the MCQ test at the end of simulation (15 points): 3 questions about the simulation (5 points by question).

Bl de France firm

Bl de France is a French wheat producer. The firm was created in 1780 by the Turgot de la Beauce brothers, nephews of the famous financial controller of the King of France Louis XVI. The firm is still managed by a descendant of the founders, Charles-Louis Turgot de la Beauce, who is an emblem of the cereal industry in France.

Bl de France fields are mainly located in the Beauce area in the center of France.

The sales structure is composed of two parts:

  • Long-term contracts: commitment to sell to food-processing firms fixed quantities of wheat (total of 5 million tons per year) at a fixed price (average price of €300 per ton) for several years

  • Sale of the rest of the production on the international wheat market at the market price.

Evolution of the stock price

The ticker symbol for Bl de France shares traded on the market is BDF.

Bl de France was introduced in the French stock market in the 1970s. During the past few years, its stock price soared. This strong price increase can be partly explained by the strong increase in the price of wheat at the world level.

Bl de France has recently announced financial results better than expected: earnings per share (EPS) of €12 higher than the market expectation of €10 given by the consensus. The price of wheat also strongly increased. As a result, the BDF stock price has jumped to a record level of €140.

What will happen today...

Traders now seem to focus on factors internal to the company. Bl de France is expected to announce its new harvest forecast for the current year. There are also investments to be made for compliance reasons.

A dozen financial analysts follow BDF stocks and participate in the market consensus. Some analysts believe that the stock price of BDF shares is overestimated due to the uncertainties affecting the company and the sector. The average price target is €130.

It is always said that the company could interest large agro-food groups that would like to take position in the sector. The rumors are going well, and we should see more clearly at the end of this day.

What is the firm going to announce? How will the market react to the news? And especially how will you react? Those are the questions...

Impact of the quantity of wheat harvested on BDF stock price

The World Cereals (WC) investment fund has developed a model that links the BDF stock price to the quantity of wheat harvested by Bl de France.

This model takes into account the structure of the company's turnover, that is to say the sales from multi-year contracts at a fixed price and the sale of the rest of the harvest on the international wheat market at a market price which varies in the time.

The stock price estimate takes into account the following:

  • The estimated profits of the current year, which depend on the current price of wheat
  • The estimated profits of the following years, which include a long-term value for the quantity harvested (8 million tons per year, which corresponds to the average observed in recent years) and for the price of wheat (€300 per ton, which corresponds to a long-term forecast).

The table below shows the estimate results given by the WC model.

Wheat harvest quantity 7.0 Mt 7.2 Mt 7.4 Mt 7.6 Mt 7.8 Mt 8.0 Mt 8.2 Mt 8.4 Mt 8.6 Mt 8.8 Mt 9.0 Mt
BDF stock price €128 €132 €136 €140 €144 €148 €152 €156 €160 €164 €168

The model assumes that the market price for wheat is fixed and equal to its current level. It is also assumed that the quantity produced by Bl de France has no impact on the price of wheat on the international market, Bl de France being a small producer at the world level.

The graph below represents the BDF stock price as a function of the quantity of wheat harvested by Bl de France according to the WC model.


Bl de France sales structure Learn more about the impact of the quantity harvested by Bl de France on the BDF stock price!
Open the Excel file to deeply understand how BDF stock price is impacted by the quantity of wheat harvested by Bl de France.


What you will learn...

The Harvest time simulation is interested in the information about the company and its interpretation by the market. What is the relevant information about the company? How is this information interpreted by the market? What is information incorporated in the stock price? This simulation looks at a key concept in financial markets: information.

Teaching goals: the Harvest time is the opportunity to understand deeper how information is incorporated by the market.

Learning objectives: this simulation will help you to learn the following elements of finance:

  • Recognize relevant information in the information flow

  • Evaluate the impact of information on market price

  • Send orders to the market based on you own analysis of information

  • Understanding the business model of the company

Before or after launching this simulation, you can learn more on information in financial markets by taking related courses to the simulation.

Download the case note to help you during the simulation.

About the authors of the simulation

Gabriel Eschbach
ACE Finance & Conseil

« The key is knowing how to process information. The market is anticipating what will happen, but things never happen as expected. The market reacts to the rumor and adjusts to the news. And you! What do you expect? How will you react? What are you going to do? »

Professor Franois Longin
ESSEC Business School

« Before starting the simulation, remember that the market is always right; and that the market is always right even when it is wrong... »