AM9

Agriculture Management, Economics, & SalesCash Markets

Unit: Agribusiness Management

Lesson Title: Cash Markets

Standards ABS.07.04.01.a. Determine the meaning and importance of risk and uncertainty with AFNR enterprises.ABS.04.01.02.a. Identify financial concepts associated with production and profit.ABS.04.01.01.c. Manage resources to minimize liabilities and maximize profit.ABS.04.01.03.a. Explain the importance of investment for an agribusiness enterprise.CS.01.04.03.b. Assess the alternative outcome of specific actions.

CCSS.ELA-Literacy.SL.11-12.4 Present information, findings, and supporting evidence, conveying a clear and distinct perspective, such that listeners can follow the line of reasoning, alternative or opposing perspectives are addressed, and the organization, development, substance, and style are appropriate to purpose, audience, and a range of formal and informal tasks.CCSS.ELA-Literacy.SL.11-12.5 Make strategic use of digital media (e.g., textual, graphical, audio, visual, and interactive elements) in presentations to enhance understanding of findings, reasoning, and evidence and to add interest.

Student Learning Objectives

Slide 2 in AM9 Cash Markets Lesson ObjectiveAfter completing the lesson on cash markets, students will demonstrate their ability to apply the concept in real-world situations by obtaining a minimum score of 80% on Cash Market Info Grams.

Enabling ObjectivesAs a result of this lesson, the student will…

1. Examine price discovery methods used in the United States.2. Define ways in which commodity markets are utilized in agribusiness.3. Explore the benefits to the producer of using cash markets.

Page 2

Time: Approximately 120 minutes

List of ResourcesCash Market. (n.d.). Investopedia. Retrieved from

http://www.investopedia.com/terms/c/cashmarket.asp.

CC Ticker. (2013). Cash Markets and Cash Trades – Commodity Challenge Tuesday Tip. Retrieved from http://www.youtube.com/watch?v=BDQkQM9uJXA.

CC Ticker. (2013). Cash Transactions – Commodity Challenge Tuesday Tip. Retrieved from http://www.youtube.com/watch?v=XsosqThg-IA.

Farms.com. (n.d.). Farms.com Market School. Retrieved from http://www.farms.com/market-school/.

Instructional Materials Laboratory. (1997). Agribusiness Sales, Marketing, and Management Instructor Guide. Columbia, MO: University of Missouri.

Production Craft. (2010). Watch My Word Is My Bond, A Documentary of the Chicago Board of Trade. Retrieved from http://www.youtube.com/watch?v=HFyk8byc9vA.

Schneiderheinze R., Wood C. (1997).  Agribusiness Sales, Marketing, and Management Student Reference. Columbia, MO: Instructional Materials Laboratory.

List of Tools, Equipment, and SuppliesAM9 PowerPoint PresentationAM9 Activity Sheet and Evaluation PacketNote cards or small sheets of paper for review activity

Key TermsSlide 3 in AM9 Cash Markets

The following terms are presented in this lesson (shown in bold italics):Commodity exchangesStock exchangesCommodities marketPrice discoveryPrice determinationSpeculatorFutures ContractBasisOption

Agribusiness Management AM9 Cash Markets

Page 3

Interest Approach: Use an interest approach that will prepare the students for the lesson. Teachers often develop approaches for their unique class and student situations. A possible approach is included here.

Slide 4 in AM9 Cash MarketsThe Chicago Board of Trade: Provide a copy for each student - AM9.1. Watch My Word Is My Bond, A Documentary of the Chicago Board of Trade at http://www.youtube.com/watch?v=HFyk8byc9vA. Have students record ten interesting facts learned about the Chicago Board of Trade.

After the video, discuss students’ thoughts and what they learned.

Facilitate a discussion about how the Chicago Board of Trade plays a part in local, state, and national agriculture.

Agribusiness Management AM9 Cash Markets

Page 4

Summary of Content and Teaching Strategies

Objective 1: Examine price discovery methods used in the United States.

Teaching Strategies Related Content1. Many agribusinesses are affected by the

trading that takes place in the commodities market or stock market.

Slide 5 in AM9 Cash Markets

Slide 6-8 in AM9 Cash Markets

Commodity exchanges Markets in which agricultural goods

like grains and livestock and contracts for their future delivery are bought and sold

Stock exchanges Markets for the purchase and sale of

shares of stock

Price discovery in the United States Commodity markets – Where cash

commodities and contracts for future delivery are traded; Chicago Board of Trade, New York Board of Trade, Kansas City Board of Trade, etc.

Price discovery – Process by which buyers and sellers arrive at a specific price for a given lot of produce at a given location; Supply and demand and market clearing price estimated, Price determination – Based on general principles of supply and demand; Equilibrium price target for each transaction is discovered in marketplace based on bargaining powers of buyers and sellers; Price does not necessarily equal market clearing price as it does in price determination

Commodities market allows price discovery system to function by providing an organized marketplace, uniform rules for trading, delivery, and payment, and collecting and distributing price information to the public

Agribusiness Management AM9 Cash Markets

Page 5

Objective 2: Define ways in which commodity markets are utilized in agribusiness. Teaching Strategies Related Content

Agribusiness Management AM9 Cash Markets

Page 6

1. Let’s discuss how we as producers can utilize commodity markets.

Slide 9 in AM9 Cash Markets

Grain elevators that warehouse storable commodities use commodity markets to protect against price decreases that may occur during time grain is being stored; Agricultural producers use commodities market to protect the price they will get in the future while crops are still in fields or livestock are still in pastures or feedlots; Agribusiness manufacturers and processors that purchase raw agricultural products use commodity markets to purchase raw materials they need at the lowest possible price.

A trader is speculating when he or she holds a market position in anticipation of a favorable price movement that will generate profits. At times speculators do up to 90% of trading that goes on in commodity markets. Addition of speculators to commodities market creates a very competitive and extremely active market. If speculators believe crops will be poor and a shortage will occur, prices for futures contracts will go up. If speculators believe crops will be good and a surplus will be produced, prices for futures contracts will go down. Speculators’ expectations of supply and demand, therefore, affect price.

Slide 10 in AM9 Cash Markets

Utilizing Commodity Markets Producers and agribusinesses protect

themselves against price changes

Speculator – Someone who is not directly involved in agribusiness and is not interested in buying or selling the actual agricultural products themselves, about which he or she generally knows little or nothing; Concerned only with selling those products at a higher price than at which they were purchased; Have a large impact on discovering price

Producers, agribusinesses, and speculators trade futures contracts for purchase and sale of commodities for future delivery, trading them on the commodities exchange

Futures contract – Legally binding agreement made on a future exchange to buy or sell a commodity; Contract specifies quantity, quality, time of delivery,

Agribusiness Management AM9 Cash Markets

Page 7

2. Suppose a futures contract is made in the Chicago exchange for a price of $70.00. The commodity must be shipped from Iowa at an estimated cost of $2.50. The cash price in Iowa will be $67.50. The basis is the $2.50 difference.

Slide 11 in AM9 Cash Markets

Slide 12 in AM9 Cash Markets

and price of commodity Basis – Difference between local

cash price and price of the expiring futures contract; May vary from one locality to another since local basis reflects supply and demand conditions of the area; Derived from how far the commodity will have to be shipped to market; Basis for grains can be expected to narrow (decrease) during the market year

Agricultural options can provide price insurance and market flexibility for producers and agribusinesses

Option – Contract that gives its owner the right but not the obligation to buy or sell a futures contract at a certain price for a certain period of time; Used only if prices are in business’s favor; Price that must be paid for options is called premium; Premium determined by what buyer and seller believe commodity is worth; Person or persons willing to sell option are willing to take the risk of a change in price of a commodity for the amount of the premium

Objective 3: Explore the benefits to the producer of using cash markets. Teaching Strategies Related Content

1. Some of the methods discussed above are part of the cash market.

Slide 13 in AM9 Cash Markets

2. What kind of benefit does the producer see using cash markets?

Cash Market Marketplace for the immediate

transaction of commodities between buyer and seller

As opposed to the marketplace for the transaction of commodities that takes place in the future

Agribusiness Management AM9 Cash Markets

Page 8

3. Have students watch the following videos:

http://www.youtube.com/watch? v=BDQkQM9uJXA

http://www.youtube.com/watch? v=XsosqThg-IA

Look for information about cash markets and the benefits of a producer using cash markets

4. Share the information/benefits in a series of ten tweets.

5. Post tweets on an 8 ½ x 11” poster for others to see.

Slide 14 in AM9 Cash Markets

Review/SummarySlide 15 in AM9 Cash Markets

Price discovery is the process by which buyers and sellers arrive at a specific price for a given lot of produce in a given location. It is the process in which the equilibrium price target is discovered and applied to each transaction in the agricultural marketplace.

Review:

Slide 16 in AM9 Cash MarketsUse PPT slide to have students answer review questions orally or individually on a sheet of notebook paper.

Slide 17 in AM9 Cash MarketsExit cards: Students will answer the following questions on a note card or small slip of paper and hand to teacher as they exit:

What did you learn today about cash markets? What questions do you still have about cash markets?

Application

Extended Activities

Agribusiness Management AM9 Cash Markets

Page 9

Explore www.marketschool.farms.com for videos about commodity marketing. Assign each student a video. After watching the video, have them create a short PowerPoint presentation, poster, or tri-fold display board depicting what they learned through the video.

Invite a local grain elevator manager or owner who uses price protections in the commodities market to discuss futures contracting as opposed to cash markets.

Expand interest approach activity, having students further research the history of the Chicago Board of Trade. Expand this activity into learning about other boards of trade: Kansas City Board of Trade, New York Board of Trade, etc.

Have a commodities broker visit the class and discuss future and cash markets. Have them analyze students’ Supervised Agricultural Experience Programs, sharing with them their suggestions on using their program in the commodity markets. Have students evaluate his advice and share their thoughts and ideas with the instructor during the next SAE visit.

EvaluationCash Market Info Gram Evaluation AM9.2

Alternate - Paper-pencil Quiz Evaluation AM9.3

Answers to EvaluationEvaluation AM9.2Answers will vary. Use scoring guide on AM9.2 to assess student work.

Alternate Evaluation AM9.31. C2. A3. D4. A5. The commodities market provides an organized marketplace, sets out uniform standards

for trading, delivery, and payment, and collects and distributes price information to the public. These functions allow price discovery to take place.

Agribusiness Management AM9 Cash Markets