Junior and Senior level Ag Bus.
Colorado Agribusiness Curriculum
Section:
Advanced Agribusiness
Unit:
Marketing
Lesson Title:
Becoming Familiar With Cash Sales
Colorado Ag
Education
Standards and
Competencies
Colorado Model
Content
Standard(s):
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.
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:
Time:
Resource(s):
Instructions, Tools,
Equipment, and
Supplies:



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
1-50 minute period
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 1-56976178-7
Farm and Ranch Business Management, by Deere Company, ISBN 0-86691-135-9
Italicized words are instructions to the teacher; normal style
Text is suggested script.
Computer, Projector, Paper, Pencils, Lesson Plan,
Unit 5, Lesson 2: Cash Sales 1
Interest Approach:
Objective 1:
Objective 2:
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
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
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
Unit 5, Lesson 2: Cash Sales 2
o
favorable
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
Objective 3:
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.
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.
Unit 5, Lesson 2: Cash Sales 3


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
o
Video


Slide 23



Review/Summary:
Application-Extended
Classroom Activity:
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
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.
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
Unit 5, Lesson 2: Cash Sales 4
Evaluation:
Evaluation Answer
Key:
Other:
Cash Sales Homework
See Cash Sales Homework Key
[ Click here and enter information. ]
Unit 5, Lesson 2: Cash Sales 5
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)
a. Cash grain price at a location of your choice for Corn
b. Cash grain price at a location of your choice for wheat
c. 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?
Unit 5, Lesson 2: Cash Sales 6
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
a. Cash grain price at a location of your choice for Corn
b. Cash grain price at a location of your choice for wheat
c. 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 7