Becoming Familiar with Cash Sales

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Becoming Familiar with Cash Sales
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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

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Objective 1

• Understanding advantages and disadvantages of
  cash sales

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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

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Advantages of Cash Sales

• Easy
• Cash Flow
• No Storage Necessary
• Local Market

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Disadvantages of Cash Sales

• Risky
• Price/Basis Usually Weak
• Market Congestion

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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.

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Objective 2

• Identify the various cash contracting methods

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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

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Advantages of Cash Forward Contracts

• Advantages
•          Easy
•          Negotiable/written
•          No market risk
•          Local market

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Disadvantages of Cash Forward Contracts

• Not Flexible
• Production risk/penalty
• Cannot take advantages of prices increasing after
  contract is made

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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

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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

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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

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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.

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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.

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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

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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

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Objective 4

• Understand various methods of electronic
  marketing

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Electronic Auctions

• Three types of media
• Telephone
• Computer
• Video

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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.

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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

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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

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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