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 transferMay 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 ContractsDefined: 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 marketsWhen 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 ContractDefined 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 contractThe 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 commodityTwo Conditions

The price expected to fallThe local basis is expected to rise

The basis is variable through out the contract.

Selling Livestock

Two waysLive 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 YieldBased on actual trimmed wholesale cuts that a carcass produces

Price Window Contract

Sets upper and lower price limits that a seller can receiveIf the current price is between the two limits then the producer is paid the current priceIf 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 mediaTelephone

Computer

Video

Telephone AuctionsAn authorized grader grades a lot of animalsWritten description of the lots including grade, location, number in lot.Conference call is set up the day of the auction between the buyers and auctioneerWhen 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 AuctionBuyers can visually inspect the livestockPrior 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 buyerAuction 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