Farm Biz Exam 2

A contract according to which an agricultural producer has to produce an agricultural commodity for a food processor (integrator) is typically referred to as

Agricultural production contract

TODAY: a set of actions for animal feed supplier and cattle farmer

Animal feed supplier and cattle farmer agree on corn quantity and price

Short hedger: Sequence of actions in the spot (cash) market Today and Later

Buy commodity (own commodity) Today and Sell commodity Later

Determine the position (action) of the dairy farmer LATER in the FUTURES market

Buys futures contracts for milk

Short Hedger: Net selling price =

Cash price Later + Gain/Loss in Futures Market - Broker commission

Agricultural production contracts are contracts for sale of goods in light of the Uniform Commercial Code T/F

FALSE

Typically, in the case of agricultural production contracts, agricultural producers own agricultural commodities that they produce for food processors (integrators) T/F

FALSE

Forward contract price is referred to as

Forward price

The analyzed forward contract is

Input forward contract for cattle farmer and output forward contract for animal feed supplier

Determine the position (action) of the dairy farmer TODAY in the CASH (SPOT) market

Owns milk (he is in the process of producing milk)

Short hedger: Sequence of actions in the futures market Today and Later

Sell futures contracts Today and Buy futures contracts Later

According to the forward contract framework

Seller and Buyer agree on product quantity and price TODAY

According to the forward contract framework

Seller delivers product in the FUTURE; Buyer makes payment in the FUTURE

Determine the position (action) of the dairy farmer TODAY in the FUTURES market

Sells futures contracts for milk

Agricultural marketing contracts are contracts for sale of goods in light of the Uniform Commercial Code T/F

TRUE

Agricultural marketing contracts are the same as output forward contracts T/F

TRUE

Typically, in the case of agricultural marketing contracts, agricultural producers own agricultural commodities that they produce to sell to various buyers (wholesalers, food processors, and food retailers) T/F

TRUE

Typically, in the case of agricultural production contracts, food processors make decisions on agricultural inputs to be used by agricultural producers and agricultural management (production) practices to be implemented by agricultural producers, who produce agricultural products for food processors T/F

TRUE

Forward contracts establish the product price in the following manner

The product price can be specified using two approaches: by stating this price in $ per unit or by establishing the product price determination procedure to be used in the future

Forward contract is referred to as "forward" because

There is a time period between the moment it is signed and the moment it is executed

Dairy farmer trades futures contracts in this particular decision situation to accomplish the following objective

To manage output price risk

A forward contract is a legally binding agreement between Seller and Buyer of the product (True or False)

True

Chicago Mercantile Exchange is

a futures market

A local livestock auction is

a spot (cash) market

Futures contracts...

are highly standardized contracts: contracts' terms and conditions (such as product quantity, quality, delivery, etc.) are pre-determined by the Exchange; sellers and buyers determine product prices

Select a statement characterizing the nature of any futures contract...

futures price is determined today; commodity delivery is in the future

Individuals and business entities who at some point in time own ag commodities and use futures markets to manage output and/or input price risks are

hedgers

A forward contract

is signed by Seller and Buyer TODAY for the product delivery in the FUTURE

Agricultural commodities are traded in

local spot (cash) markets

A short hedger

operates in both the spot (cash) market and futures market

Futures contracts are traded in

organized exchanges

Short hedge affects the hedger's (input price or output price)

output price

Short hedge affects the hedger's (revenu or costs)

revenue

Determine the position (action) of the dairy farmer LATER in the CASH (SPOT) market

sells milk

Individuals and business entities who do not own ag commodities and use futures markets to generate profit from anticipated price movements are

speculators

Agricultural producers use futures markets

to manage (to hedge) output price risk and input price risk by trading futures contracts

Agricultural producers use cash (spot) markets

to sell and to buy agricultural commodities