Colorado Agribusiness Curriculum
Section: / Advanced AgribusinessUnit: / Marketing
Lesson Title: / Becoming Familiar With Cash Sales
Colorado Ag Education Standards and Competencies / AGB11/12.04 - The student will understand the influences of agricultural economy and its influences on the overall economy.
Understand the law of supply and demand.
Colorado Model Content Standard(s): / English Standard 1: Students read and understand a variety of materials.
English Standard 4: Students apply thinking skills to their reading, writing, speaking, listening, and viewing
English Standard 5: Students read to locate, select, and make use of relevant information from a variety of media, reference, and technological sources.
Student Learning Objectives: / · Student will be able to (SWBAT) Understand advantages and disadvantages of various types of cash sales
· SWBAT identify the various cash contracting methods
· SWBAT Understand various methods of electronic marketing
Time: / 1-50 minute period
Resource(s): / Marketing Grain & Livestock, 2nd Edition, by Gary F. Stasko, Iowa State University Press, ISBN 0-8138-2957-7
www.cbot.com
www.cme.com
Strategies for Great Teaching, by Mark Reardon and Seth Derner, ISBN 1-56976-178-7
Farm and Ranch Business Management, by Deere Company, ISBN 0-86691-135-9
Instructions, Tools, Equipment, and Supplies: / Italicized words are instructions to the teacher; normal style
Text is suggested script.
Computer, Projector, Paper, Pencils, Lesson Plan,
Interest Approach: / Who wants to make some CASH? Hey, say a specific students name lets make a deal I will sale you a cash forward contract for wheat. I think 3.00/bu sounds good how about you? (let the student answer) What did you just (agree/disagree) with me about? So what is a cash forward contract? What is a Cash Sale?
Slides 1-3
Objective 1: / Slide 4
· CASH SALE
Defined: as a seller delivers the commodity to a buyer and takes an immediate CASH payment.
· The commodity must be physically in existence at the time of the transfer
· May be made at harvest or later from storage in crops or at weaning, yearling, etc. for livestock
Slide 5
Advantages
· Easy
· Cash Flow
· No Storage Necessary
· Local Market
Slide 6
Disadvantages
· Risky
· Price/Basis Usually Weak
· Market Congestion
Objective 2: / Slide 9
Cash Forward Contracts:
· Defined: Cash market price is established for later delivery of a specific quantity and quality of a commodity between the buyer (an elevator, packer, processor, or exporter) and a seller (a producer or elevator)
· The contract price is tied directly to the price being discovered in the futures markets
· When the producers signs a forward contract, his exposure to price risk has been transferred to someone else who is trading in the futures complex
Advantages
Slide 10
· Easy
· Negotiable/written
· No market risk
· Local market
Slide 11
Disadvantages
· Not Flexible
· Production risk/penalty
· Cannot take advantages of prices increasing after contract is made
Slide 12 & 13
Deferred Pricing Contract
· Defined is when a seller delivers the commodity to the buyer at some point in time but maintains control of when it is priced.
· The contract allows a producer to take advantage of a rise in price and not pay carrying cost.
· Another type of deferred price contract is the basis contract
o The seller can fix the cash – futures differential or basis
o The price is not fixed just the basis
o Should only be considered only when the local basis is usually favorable
o Any narrowing of the cash-futures differential is foregone
Slide 14
Deferred Payment Contract
· Delivery and pricing may take place in, say, the fall, but payment is not received until after the new tax year has begun.
· Title to the commodity goes to the buyer upon delivery
· Recognized mean of tax planning
Slide 15
Minimum Price contracts
· Promoted as cash contracts but are actually hedges in the options market
· The buyer purchases put options equal to the quantity specified in the minimum price contract and holds the position until the cash commodity is delivered.
· One advantage of using a minimum price contract over a short option hedge is that the elevator or packer handles all of the trading.
Slide 16
Hedge to arrive
· Sellers indirect use of the futures market to capture what is considered to be an acceptable price for a commodity
· Two Conditions
o The price expected to fall
o The local basis is expected to rise
· The basis is variable through out the contract.
Slide 17
Selling Livestock
· Two ways
o Live Weight
§ Group marketing – All animals are in a group
§ Sorted or selected- the animals are segregated into groups based upon their grade
o Carcass grade and Yield
§ Based on actual trimmed wholesale cuts that a carcass produces
Slide 18
Price Window Contract
· Sets upper and lower price limits that a seller can receive
· If the current price is between the two limits then the producer is paid the current price
· If the current price is above or below the two limits the seller and buyer split the difference between the current price and the appropriate limit
Formula Price (Cost-Plus) Contract
· Designed to help guarantee the producer a selling price above the production costs
· Costs of input plus a fixed dollar amount added by buyer equals the minimum price.
Objective 3: / Slide 20
Electronic Auctions
· Three Types of media
Slide 21
o Telephone
§ An authorized grader grades a lot of animals
§ Written description of the lots including grade, location, and number in lot.
§ Conference call is set up the day of the auction between the buyers and auctioneer
§ When bidding stops the lot is considered sold and bidding starts on the next lot. Usually 20 to 30 seconds of no bids is considered that the lot is sold.
Slide 22
o Computer
§ Computer terminals give buyers direct access to the lot descriptions on the computer instead of paper
§ Bids are keyed until no buyer wishes to bid more
§ After about 20 to 30 seconds of no bids the lot is considered sold.
§ Appealing to any producer that wants to set the minimum price for their lot because a computer will take and store bids but will not consider the lot sold until the bids reach or exceed the minimum set price
Slide 23
o Video
§ Buyers can visually inspect the livestock
§ Prior to the auction date a representative goes around and films the lots to be sold.
§ Many times the seller will explain the terms of payment of delivery procedures on the tape as well.
§ A catalog is also provided to each buyer
§ Auction day the video is projected on a screen and bidding takes place by telephone
Slide 24
Web Based Marketing
· The use of the internet to buy and sell products where the buyer can scan what sellers have and contact them if they see an attractive bid
· Used by most niche markets
Review/Summary: / So cash sales are when a seller delivers the commodity to a buyer and takes an immediate CASH payment. Some of the advantages of cash sales are that they are easy and they create cash flow. But they also are risky and the price basis is usually weak.
Cash forward contracting is when a price is established for a later delivery of a specific quantity and quality of a commodity between the buyer and seller.
A deferred pricing contract is when a seller delivers the commodity to the buyer at some point in time but maintains control of when the price is set.
The two ways to sell livestock are live weights and carcass grade and yield.
Electronic Auctions are becoming more and more popular as the internet takes this world by storm.
Application--Extended Classroom Activity: / Use the Internet to find examples of all the electronic based cash sales
Application--FFA Activity: / Ag Sales or Ag Marketing
Application--SAE Activity: / Create a web page for their SAE
Evaluation: /
Cash Sales Homework
Evaluation Answer Key: /See Cash Sales Homework Key
Other:
Cash Sales Homework
Name______
1. Find the following cash prices and state the location you used (the website www.ams.usda.gov is a good one for cash prices if you don’t have any other site to use)
- Cash grain price at a location of your choice for Corn
- Cash grain price at a location of your choice for wheat
- Cash price at a location of your choice for 750# feeder calves
2. Explain the advantages and the disadvantages with forward contracting
3. Suppose you are considering selling you fat cattle on a live-weight basis versus selling them on a carcass grade and yield basis (grid). What would be the advantages and disadvantages of each?
Cash Sales Homework Key
Name______
ANSWERS WILL VERY FROM STUDENT TO STUDENT
3. Find the following cash prices and state the location you used (the website www.ams.usda.gov is a good one for cash prices if you don’t have any other site to use) Answers will differ depending on location and time of year
- Cash grain price at a location of your choice for Corn
- Cash grain price at a location of your choice for wheat
- Cash price at a location of your choice for 750# feeder calves
4. Explain the advantages and the disadvantages with forward contracting
3. Suppose you are considering selling you fat cattle on a live-weight basis versus selling them on a carcass grade and yield basis (grid). What would be the advantages and disadvantages of each?
Unit 5, Lesson 2: Cash Sales 1