The first is transactions demand for liquidity, which arises from the normal operations of the farm business. The second is precautionary demand for liquidity and is necessary to respond to business adversity or meet unexpected demands for cash. The third type is investment demand or speculative demand for liquidity. This demand enables the business to respond to new or unforeseen investment opportunities. Sources of Liquidity Liquidity can be generated by liquidation of assets or by borrowing.
Assets have differing abilities to meet cash demand.
These assets can be converted to cash relatively easily at little cost. Stored grain inventories represent another source of liquidity. However, this source of liquidity may have some associated costs. Storing grain for liquidity purposes may not allow the firm to follow its optimal marketing strategy. Thus, a firm that chooses to use grain inventories for liquidity needs to coordinate liquidity management with marketing strategies.