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Grain Marketing Contracts

Managing market risk can be daunting, whether you’re a seasoned user of marketing contracts or just beginning to use grain pricing tools. Click the links at left for brief contract descriptions that can help you get started. For more details contact your local Grain Marketing Specialist.

Not sure which program would be best for you? Check out our Grain Marketing Menu to see what's available.

Priced Contract (PC)

A contract with a fixed (final) price for a specific delivery requirement. This contract is also referred to as a “flat price” contract.

Advantages:

  • Quantity and price is fixed, with no further price risk.
  • Quality risk is passed to buyer.
  • Money is immediately available.

Disadvantages:

  • Pricing flexibility and delivery are eliminated.
  • No chance for further price increases.

*Offerings subject to change without notice. The above contracting tools involve market risks and may not be appropriate for all producers.

Basis Fixed Contract (BF)

This is a formula price contract. The formula to determine price is: basis + board of trade price. At the time of contracting, the basis is established, and final price is then determined when the board price is set. Board price must be set prior to expiration date in the contract. BF contracts may be rolled forward to another board contract month, at the spread between the futures months, plus a fee for a contract change.

Advantages:

  • Downside basis risk is eliminated.
  • May take advantage of future CBOT rallies.
  • May avoid a weak (harvest) basis or low flat price.
  • Can receive an advance of 50% of contract value (ex. $2.00 cash price: advance $1.00 per bu.).
  • Quality risk passes to buyer.
  • Avoids storage or price later charges.
  • No minimum bushel requirements.

Disadvantages:

  • Future basis improvements cannot be realized.
  • You remain subject to the risk of changes in the CBOT futures prices.
  • Requires knowledge of local historical basis.
  • There is risk in FC asking for additional equity in case cash values fall below advancement levels.

*Offerings subject to change without notice. The above contracting tools involve market risks and may not be appropriate for all producers.

Hedge To Arrive Contract (HTA)

This is a formula price contract. The formula is: basis + board of trade price. At the time of contracting, the board price is established, and final price is then determined when the basis is set. The basis must be set prior to time of delivery or before the contract expiration date.

Advantages:

  • Takes advantage of high futures levels, leaving opportunity for basis to improve.
  • Futures downside price risk is eliminated.
  • No margin calls or exchange fees and can eliminate storage costs.

Disadvantages:

  • Open to basis-level widening.
  • Cannot take advantage of futures rallies.
  • Cannot trade in and out of HTA contracts as with futures contracts.
  • The title of the grain is transferred.
  • The delivery of the contract is mandatory.
  • Payment is not received until basis is set and the grain is delivered.

*Offerings subject to change without notice. The above contracting tools involve market risks and may not be appropriate for all producers.

Minimum Price Contract (MP)

This contract establishes a guaranteed base price protecting you against lower prices, but permits participation if the market rallies. The final price will be the minimum price plus any value the option provides if the market rallies prior to the expiration of the option.

Two Contract Alternatives:

1.  Minimum Price using a put option:

  • Lower price floor than using a call option
  • Buy a put option that is at or out-of-the-money
  • Minimum Price is the strike price of the option minus the premium paid and basis

2.  Minimum Price using a call option:

  • Higher price floor than using a put option
  • Set futures by entering into an HTA or Priced Contract
  • Buy a call option at or out-of-the-money
  • Minimum Price is the futures price minus the premium paid and basis

Advantages:

  • Risk of CBOT futures price decline is eliminated, yet allows the opportunity to participate in higher futures prices if the market moves higher prior to the contract’s expiration date
  • The minimum price is guaranteed and paid in full upon completion of delivery.
  • No upfront premium - Wheat Growers covers the premium and deducts it from the futures price
  • Premiums are based on CBOT traded options
  • Ability to roll up to higher strike prices if the market rallies to increase the Minimum Price floor and still participate in further market appreciation
  • Very safe and costs are easily identified

Disadvantages:

  • Does not permit trading in and out of markets as delivery is required
  • Depending on option prices and volatility, it may cost more than storage rates
  • At the time of contracting, the Minimum Price level may be less than forward contracting
  • Requires selling in 5,000 bushel increments

What are the costs associated?

  • To initiate a Minimum Price Contract it costs $0.02/bu for corn and $0.04/bu for soybeans.
  • The new rolling feature that allows you to improve your minimum price if the market rallies costs $0.01/bu for each roll. The amount of times you can roll your strike price is not limited.
  • If the option is in-the-money and you elect to exercise the option to improve your final price $0.02/bu will be deducted from the option value.

*Offerings subject to change without notice. The above contracting tools involve market risks and may not be appropriate for all producers.

Target Price Agreement (OP, OB, OH)

Producers may enter into an agreement, whereby they make firm “offers” to enter into a cash grain contract with Wheat Growers. We will then “accept” that offer if market conditions allow.

Advantages:

  • Price targets can be reached if you are not able to monitor the markets minute by minute.
  • Takes advantage of short-lived day rallies, if your offer is in the quote system.
  • If you have a price goal in mind, it puts it in writing and gives you something to watch and monitor.
  • Any price amount and bushel quantity can be offered.
  • Offers can be used to price cash, storage or new-crop delivery grain.
  • Offer to sell may be cancelled by seller anytime, providing notice has been received by buyer prior to offer being filled.

Disadvantages:

  • The grain will be priced at an offer, and if the market rallies past the set offer, additional gains will not be realized.
  • Putting offers to sell at even dollar amounts can sometimes be costly. An example is an offer to sell $2.00 corn, and the price is $1.99; then the market falls to $1.50. Fails to “pull the trigger.”

*Offerings subject to change without notice. The above contracting tools involve market risks and may not be appropriate for all producers.

Floored Average

This marketing agreement allows you to establish a minimum futures floor price, but also allows you to participate in the upside. The Floored Average contract pays you the average futures price over a set period of time. However, you are guaranteed no worse than a pre-defined floor price.

Advantages:

  • The producer is guaranteed the higher of the average futures level or the floor price.
  • The average price is specified.
  • Flexibility to establish basis anytime prior to delivery.
  • Removes the stress, frustration and risk of decision making with marketing.

Disadvantages:

  • The contract is sensitive to the timing.
  • Does not capture all the gains during a volatile market.

*Offerings subject to change without notice. The above contracting tools involve market risks and may not be appropriate for all producers.

Delayed Pricing (DP)

This contract allows a producer to move grain to a Wheat Growers location without establishing any price. Charges vary with market conditions.

It is important to note that, unlike storage, title to the grain passes to the buyer upon delivery. Producers will not be able to use price later grain as collateral for government loans or Loan Deficiency Payments (LDP). Service charges are based on market differentials (carries/inverses) and may or may not be less than storage charges.

Click here to view Wheat Growers DP options per commodity.

Advantages:

  • Can make delivery while avoiding historically low (harvest) prices.
  • The emotionalism of pricing is separated from the physical handling of the grain.
  • Do not need on-farm storage, and price later may be cheaper than commercial storage.
  • Quality risk passes to buyer upon delivery.
  • On free price later, it allows producers to move grain when they have time; then they can sell it in any bushel amount, when they decide.
  • Corn is shrunk to 15% moisture vs. 14% on storage and warehouse receipts.

Disadvantages:

  • Subject to basis and CBOT price risk.
  • No payment until contract is priced.
  • This is not STORAGE! Title passes to buyer and you are unable to get a CCC loan or LDP once put into price later.

*Offerings subject to change without notice. The above contracting tools involve market risks and may not be appropriate for all producers.


PLEASE NOTE: There is an inherent risk in grain marketing. Grain marketing decisions are the decision of individual producers. Wheat Growers assumes no responsibility for grain marketing decisions made by individual producers.