UNIVERSITY OF ARKANSAS RESEARCHERS CREATE SOFTWARE TO TEACH STUDENTS THE TOOLS OF TRADING

FAYETTEVILLE, Ark. - Passing grain elevator after grain elevator on a Kansas highway, an unsuspecting motorist has no understanding of the complex mix of mathematics, risk management and markets that go into buying and selling the steel building's contents. But Andrew McKenzie, assistant professor of agricultural economics at the University of Arkansas, has developed a program to help his students, and anyone else, learn how grain moves through the market.

McKenzie and research assistant Steven Nichols have created "Basis Trader,T" a computer game that students use to learn about the trials and triumphs of grain marketing.

"The game really helps to conceptualize what I'm teaching in class," McKenzie said.

The game looks at what happens when a product, like corn, leaves the farm and goes to the grain elevator. Grain elevators store huge quantities of products, then decide when the best time to sell those products would be. They do this based on futures prices for delivery some months ahead, and base these decisions on past performances in the market.

The game contains real data from around the country, and the player becomes a grain elevator operator who must make decisions about storing and selling grain based on the futures market and past years' prices. The player can view historical data for the past five years and use that information to help determine his or her actions.

To do this, however, the grain storage companies use an economic tool called basis trading to hedge their bets. The market can be very volatile, with highs and lows occurring without warning. Basis trading allows buyers and sellers to minimize risk while still making a profit from the crops they sell.

"Basis tends to be more predictable than cash," McKenzie said. "The game will teach hedging and help people see how it helps to reduce risk."

By marketing grain over the course of a year, the students study the art and science of predicting basis changes in commodity markets and develop grain merchandising skills.

"The main focus of the program is risk management as opposed to speculating and price forecasting," McKenzie said. This sets the program apart from other software packages on the market today.

McKenzie plans to make Basis Trader available to a wider audience in the future.

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Andrew McKenzie, assistant professor, agricultural economics, (479) 575-2544, mckenzie@uark.edu

Melissa Lutz Blouin, science and research communications manager, (479) 575-5555, blouin@uark.edu