Grain Contracts

Spot Cash Contract

Spot Cash contracts are the most commonly used of any of the contracts. It is used when the cash price has reached your goal with little thought to either futures or basis.

Positives:

  • Easiest and safest to execute
  • Cash price and quantity are fixed
  • All costs and risks of price decrease are eliminated
  • Payment received immediately after contracting
Negatives:
  • Lack of ability to participate in a market rally
  • Required to have grain delivered already or must deliver immediately

Forward Cash Contract

Forward Cash Contracts allow the producer to lock in a cash grain price for a specific delivery date and location in the future. In addition, this contract is also preferred to lock in a crop selling price.

Positives:

  • Executed easily
  • Cash price and quantity are fixed
  • Risk of a price decrease is eliminated
  • No additional fees
  • Have the ability to defer income
  • Ownership exchanged upon delivery and payment
Negatives:
  • Payment not received until grain is delivered
  • Lack the ability to participate in a market rally
  • Required to deliver grain
  • Possible penalty for cancellation

Delayed Price Contract

Delayed Price Contracts allow producers a high degree of price flexibility for an extended time period. A service charge may or may not be used during the marketing year. If a service charge is being used, a price increase must be expected to offset this expense.

Positives:

  •  Price flexibility in all aspects (Cash, Futures, Basis)
  •  Futures and basis during delivery and pricing date are not associated
  •  Storage shrink and costs are eliminated


Negatives:

  • Involves the transfer of grain ownership to elevator
  • Required to deliver grain as stated in contract
  • Payment is not received until the price is fixed
  • Service charges may be implemented
  • Open to price risks

Minimum/Maximum Price Contract

Minimum and maximum price contracts are a very safe opportunity for the producer to participate in market movement for further profit. The producer should use when he anticipates a favorable market move that will enhance his base price but wants to market and lock in a minimum or maximum price.

Positives:

  • Very Safe
  • Receive base or floor price up front
  • Can participate in market rally with defined risks (premium)
  • Premium may be cheap compared to interest, storage, drying, shrink, and handling costs
  • Flexible - can be used with a variety of contract strategies


Negatives:

  • Lose potential basis appreciation opportunity
  • Premium and service charges may be costly
  • Must successfully market option to add value
  • Done in 5000-bushel increments
  • Pricing must done before option expiration or premium is forfeited

Basis Contract

Basis contracts are similar to forward cash contracts in that they allow the producers to lock in a future delivery price, but only partially. The partially fixed price is basis: the difference between cash and futures; with the futures to be fixed at a later time.

Positives:

  • Risk of a basis decrease is avoided
  • Storage costs and risks can be avoided
  • Allows for future pricing flexibility
Negatives:
  • Involves the transfer of grain ownership
  • Required to deliver grain as stated in contract
  • Futures must be established and grain delivered before payment is received
  • Risk of a futures price decrease
  • Must be knowledgeable on futures and basis levels

Hedge to Arrive Contract

Hedge-to-arrive contracts are the reverse of a basis contract. Use this contract when futures are high and believe futures will drop and simultaneously basis is wide and should narrow.

Positives:

  • Lock in satisfactory futures price and eliminate downside risk
  • Still have opportunity to capture basis improvements
Negatives:
  • Ownership of grain is transferred upon contracting and delivery
  • Cannot take advantage of futures price rallies
  • Risk basis does not improve
  • Small service fee required to establish contract

Deferred Payment Contract

Deferred payment contracts are used to defer tax liability to another tax year. Please consult your tax accountant for proper application.

Positives:

  • Deferment of tax liability
  • Can be included with any type of pricing contract


Negatives:

  • Very rigid contract - must be to maintain integrity
  • Must depend on financial strength of company
  • Cannot participate in market rally

Average Price Contract



Average price contracts are used to even out the ups and downs of a volatile market. The producer commits a specific number of bushels to a location at harvest time, and an average futures price is created over the pricing period. The producer can set the basis at any time up until delivery. Contact a merchandiser for details and the deadline to enroll.

Positives:
  • Bushels are priced on a weekly basis
  • Eliminates stress of decision-making and watching the market
  • Cannot sell at the market low
  • Flexibility to price basis at a later time

Negatives:
  • Give up the right to market enrolled bushels at the market high
  • Limited sign-up period
  • Risk basis changes
  • Service/enrollment fee