Becoming Familiar with
Cash Sales
Becoming Familiar with Cash
Sales Objectives:
Understand advantages and
disadvantages of various types of cash
sales
Identify the various cash contracting
methods
Understand various methods of
electronic marketing
Objective #1
Understanding advantages and
disadvantages of cash sales
Cash Sales
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
Advantages of Cash Sales
Easy
Cash Flow
No Storage Necessary
Local Market
Disadvantages of Cash Sales
Risky
Price/Basis Usually Weak
Market Congestion
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 #2
Identify the various cash
contracting methods
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 of Cash Forward
Contracts
Advantages

Easy

Negotiable/written

No market risk

Local market
Disadvantages of Cash Forward
Contracts
Not Flexible
Production risk/penalty
Cannot take advantages of prices increasing
after contract is made
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 an not pay carrying cost.
Another type of deferred price contract is the basis
contract
The seller can fix the cash – futures differential or
basis
Deferred Pricing Contract
The price is not fixed just the basis
Should only be considered only when the
local basis is usually favorable
Any narrowing of the cash-futures
differential is foregone
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
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.
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
The price expected to fall
The local basis is expected to rise
The basis is variable through out the
contract.
Selling Livestock
Two ways
Live Weight
Group marketing – All animals are in a group
Sorted or selected- the animals are segregated into
groups based upon their grade
Carcass Grade and Yield
Based on actual trimmed wholesale cuts that a
carcass produces
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
Objective 4:
Understand various methods of
electronic marketing
Electronic Auctions
Three types of media
Telephone
Computer
Video
Telephone Auctions
An authorized grader grades a lot of animals
Written description of the lots including grade,
location, 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.
Computer Auctions
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
Video Auction
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
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