Agricultural commodities and contracts

Today we will see contract that can use producers and what difference between them, advantage and problem that we can face.
Producer can use four type of contract to sell his production or do a combination between then to get his max benefit.
1. Cash sales:
Under this producer deliver his production to the market (exporter elevator, factory…..).This is a live stock sale to the cash market with option price of the day. Under this type of contract seller get fixed price with no ability to stop the transaction. Many consider cash sales one of the riskiest sale contract but this cannot mean that producers will lose their benefit.
2. Forward contract:
Seller and buyer negotiate price and quantity for a later delivery. These types of contract are commonly used in grains. Producer enters in a business relation with buyer to sell him specified quantity and quality and fixed price with no change. Seller is protected if price fell but he can’t pretend to increase price if in the cash market, price in the delivery day is higher than his contracted price.
Producer must deliver the specified amount, even if he has a crop failure.
3. Futures contract:
They type of contract in the most used in grains business. In this agreement you sell or buy products at a date in the future through a brokerage firm that transact the trade for you. Brokerage Company works with your performance bond that you must deposit for the future contract. Once you are working with company all trade and done throe phone call and you pay your broker a commission for every contract treated.
4. Options on futures contracts:
 Options are traded at futures exchanges too. An option is the right, but not the obligation, to buy or sell a futures contract at a specified price. You pay a premium when you buy an option, and you pay a commission to the broker.
For example, if you buy a put option and prices rise, you can let the option expire and sell in the cash markets at a higher price. If prices fall, you can protect yourself against the low cash price by:
• Offsetting the option (sell the same type of option).
• Exercising the option (exchange the option for the underlying futures contract).
Marketing Alternative
Cash sales
• Easy to transact
• Immediate payment
• No set quantity
• Maximize risk
• No price protection
• Less flexible
Forward contract
• Easy to understand
• Flexible quantity
• Locked-in price
• Minimize risk
• Must deliver in full
• Opportunity loss if prices rise
Futures contract
• Easy to enter/exit
• Minimize risk
• Often better prices than
forward contracts
• Opportunity loss if prices rise
• Commission cost
• Performance bond calls
• Set quantities
Options contract
• Price protection
• Minimize risk
• Benefit if prices rise
• Easy to enter/exit
• Premium cost
• Set quantities
• Commission cost

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