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Agribusiness Library. Lesson 060097: Introduction to Commodity Trading. Objectives. 1. Identify and briefly describe the possible methods of marketing commodities. 2. Describe cash sales, and examine the advantages and disadvantages of cash sales.
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Agribusiness Library Lesson 060097:Introduction to Commodity Trading
Objectives 1. Identify and briefly describe the possible methods of marketing commodities. 2. Describe cash sales, and examine the advantages and disadvantages of cash sales. 3. Describe forward contracting, and examine the advantages and disadvantages of forward contracting. 4. Investigate the impact of basis on marketing, and demonstrate the ability to calculate basis.
Terms • basis • basis contract • cash sale • deferred pricing agreement • forward contract • futures contract • option on a futures contract
What are the methods of marketing commodities? The methods of marketing commodities are cash sales, forward contracts, futures contracts, and options on futures contracts. These methods can be used individually or in combination.
What are the methods of marketing commodities? A. A cash sale is a sale that occurs at the point of delivery in which the seller receives immediate payment for a commodity at the price in effect that day.
What are the methods of marketing commodities? B. A forward contract is a contract in which a buyer and a seller agree to the purchase and sale of a definite quantity and quality of commodity at a specific price on a specific date of delivery. This allows the price to be set, or locked in, thus providing protection from price changes.
What are the methods of marketing commodities? C. A futures contract is a contract commonly made through a brokerage house that transacts the trading for an individual. This contract allows the individual to buy or sell a commodity at a future date. D. An option on a futures contract is the right, but not the obligation, to buy or sell a futures contract at a specific price before a specific time. Options provide price protection and the opportunity to benefit from favorable price changes.
What are cash sales? What are the advantages and disadvantages? The cash sale of a commodity occurs at the point of delivery to the cash market, with payment at the price in effect that day. A. A producer can deliver hogs to a packer or grain to an elevator and get cash right away. This type of transaction is easy but is one of the riskiest marketing choices.
What are cash sales? What are the advantages and disadvantages? B. A cash market is any physical location where a product is bought or sold for cash. C. Advantages of cash sales for producers are: 1. They are easy to transact. 2. They provide immediate payment. 3. There is no set quantity. D. Disadvantages of cash sales for producers are: 1. They maximize risk. 2. There is no price protection.
What are cash sales? What are the advantages and disadvantages? E. A deferred pricing agreement is another avenue for making a cash sale. The commodity is delivered, but the price is set later. This allows grain producers to deliver grain, reduce the physical risk of holding the grain (corn, wheat), and reduce the storage cost without having to agree to the current price. A producer may deliver wheat to a processor at the end of harvest in October and then choose a price at a later time—for example, between date of delivery and February.
What is forward contracting?What are the advantages and disadvantages of forward contracting? In a forward contract, the buyer and the seller agree to the purchase and sale of a definite quantity and quality of commodity at a specific price on a specific date of delivery. This allows the price to be set, or locked in, thus providing protection from price changes.
What is forward contracting?What are the advantages and disadvantages of forward contracting? A. Forward contracting allows a producer and a buyer to negotiate price for a later delivery. This marketing approach provides price protection if an unfavorable price change occurs but provides no benefits if a favorable price change occurs. The negotiated price still applies whether the price goes up or down. B. Besides price, the written agreement should include quantity, quality, delivery time, and location.
What is forward contracting?What are the advantages and disadvantages of forward contracting? C. Advantages of forward contracts for producers are: 1. They are usually easy to understand. 2. They minimize risk. 3. They guarantee the sale of a given quality and quantity of a commodity. 4. They provide price protection. 5. They allow the computation of profit once production costs are determined.
What is forward contracting?What are the advantages and disadvantages of forward contracting? D. Disadvantages of forward contracts for producers are: 1. They require delivery of a given quality and quantity of a commodity. 2. There is no benefit from better prices.
What is forward contracting?What are the advantages and disadvantages of forward contracting? E. Because a contract is a legally binding agreement, it should be developed by a lawyer and carefully reviewed by both parties before signing. A contract should include: 1. The names and addresses of the buyer and the seller 2. The date of delivery 3. The price of the product
What is forward contracting?What are the advantages and disadvantages of forward contracting? E. A contract should include (cont’d) 4. The quantity of the product 5. The quality of the product and how it will be determined 6. Exactly how and when payment will be made 7. Penalties if either party defaults 8. The signatures of both parties
What is the impact of basis on marketing? Basis is the relationship between the local cash market price and the futures market price. A. The cost of delivery of a commodity to a specific place is reflected in the futures price. The cost of delivery of a commodity to a different place is mirrored in the cash price. Each of these costs includes transportation, storage charges, and marketing costs. Therefore, the basis can vary from one market or location to another.
What is the impact of basis on marketing? B. Basis can be seen as consistently positive or consistently negative and can change during the futures contract length. Knowledge of basis patterns and attention to local basis patterns is essential in understanding the impact of basis on the market.
What is the impact of basis on marketing? C. The basis is calculated by subtracting the price of the nearby futures contract from the local cash market price. • If the cash price for soybeans is $7.50 and the futures price is $7.70, the basis is $7.50 – $7.70 = –$0.20, or 20 cents under. • If the cash price for corn is $4.25 and the futures price is $4.22, the basis is $4.25 – $4.22 = +$0.03, or 3 cents over.
What is the impact of basis on marketing? C. As a basis value approaches positive integers, it is said to be strengthening. As a basis value becomes less positive, it is said to be weakening.
Review • Name the four methods of marketing commodities. • Name the advantages and disadvantages of a cash sale. • What are the important points that should be in a forward contract? • Define basis. How is it calculated?
