The Davis Company grows soybeans and processes them into soybean meal for eventual sale to food companies.

The Davis Company grows soybeans and processes them into soybean meal for eventual sale to food companies. Davis currently owns 10,000 tons of soybean meal, carried in their inventory at a cost of $3,400,000. Soybean meal trades on the spot markets for $350 per ton; three-month futures are selling for $363 per ton. Davis expects to sell the 10,000 tons in 90 days. On August 1, 20X9, Davis sells 10,000 tons of soybean meal futures to be delivered on October 30, 20X9, at the $363 price. The price of Davis' futures contracts has advanced to $367 and the spot price is $354 on September 30, when the books are closed for interim reporting purposes. Davis closes out its short position on October 28, 20X9, when the future price is $361 per ton and the spot price is $348.

Required: Address each of the following four questions separately, using the above information. Document your thought process, any authoritative literature, as well as your conclusions for each of the four questions.

1.      Assuming that Davis deposits $75,000 margin with the broker on August 1, prepare the journal entries it makes on August 1, September 1 and October 28. Davis is required to record.

2.      If Davis sells the soybean meal in the spot market on November 2, 20X9, for $348.50 per ton, calculate the net cash gain or loss from the sale, taking into account the hedging transaction.

3.      Suppose instead that Davis purchased the 10,000 tons of soybean futures on August 1, 20X9, closing the long position on October 28, 20X9. Calculate the net cash gain or loss on the long futures position and compare its accounting treatment with the gain or loss on the short futures position in number 1 above at October 28, 20X9

4.      How would you recommend Davis structure this transaction to maximize their return?