Transcript Module 9 PPT

Module 9: Cash Sale Transactions
Cash Market
A cash market is a “local” market where commodities are usually
physically traded, often when the price is established.
Examples:
 Grain Elevator
 Feed Mill
 Ethanol Plant
 Livestock Feeder
 Sale Barn
Cash Price
• Producers who physically trade commodities are generally most
concerned with managing risk of changing cash market prices
What causes changes in commodity prices?
Changes in Supply & Demand
Cash Price
Increased Supply = Lower Price
Decreased Supply = Higher Price
Increased Demand = Higher Price
Decreased Demand = Lower Price
Cash Sale
• Type of grain contract derived from a futures price and basis.
• Also known as “spot sale”
Cash Price = Futures Price + Basis
• Can be for immediate delivery or negotiated for future delivery.
• “Locks-in” the cash price, so both futures price and basis are “locked in”.
Cash Sale
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Advantages
Easy to understand
Doesn’t matter to seller if price
goes down
Price, quantity and time of
delivery are known
No service or storage costs
Payment is available at delivery
Disadvantages
• If price goes up, seller can’t
get a higher price
• Payment not received until
delivery
• Possible penalty for
cancellation
Cash Sale Example
Sold 15,000 bushels of corn to ADM for delivery today
Futures Price = $4.25
Basis = -.25
Cash Price = Futures Price + Basis
Date
Cash Price
Futures Price
Actual Sale Price =
Basis
Cash Sale Example
Sold 15,000 bushels of corn to AGP for delivery today
Futures Price = $4.25
Basis = -.25
Cash Price = Futures Price + Basis
$4.00 = $4.25 + (-.25)
Date
dd/mm/yy
Cash Price
Futures Price
Basis
$4.00
$4.25
-.25
Actual Cash Price = $4.00
Cash Sale: Livestock
• Feeder cattle selling at an auction market or direct to a feed yard
normally sell $20-$40 per hundredweight above the current futures
price.
• Feeder cattle are generally sold at:
• Livestock auction markets
• Cattle feedlots
• Backgrounding yards
Cash Sale Example
Sold 20 head of live cattle to local feed yard for delivery today
February Futures Price = $175/cwt
Basis = $1.00/cwt
Cash Price = Futures Price + Basis
Date
Cash Price
Futures Price
Actual Sale Price =
Basis
Cash Sale Example
Sold 20 head of live cattle to local feed yard for delivery today
February Futures Price = $175/cwt
Basis = $1.00/cwt
Cash Price = Futures Price + Basis
$179/cwt = $175 + 1.00
Date
dd/mm/yy
Cash Price
Futures Price
Basis
$176
$175
$1.00
Actual Cash Price = $176.00