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 deliver grain immediately after contracting

Forward Cash Contract

Forward Cash Contracts allow the producer to lock in an elevator's deferred cash grain price. Normally, this is done the deferred price is enough to cover the producer's interest and storage costs. In addition, this contract is also preferred to fix a crop selling price.

Positives:

  • Executed easily

  • Cash price and quantity are fixed

  • Risk of a price decrease is eliminated

  • Have the ability to lock in storage and interest costs

  • Have the ability to defer income

  • Title 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 by your local elevator during the marketing year. If service charge is being used, a price increase must be expected to offset this expense.

Positives:

  • Price flexibility is all aspects,

  • futures and basis Delivery and pricing date are not associated

  • Storage risk and costs are transferred

  • Frees up farm storage for new crop

Negatives:

  • Involves the transfer of grain title

  • Required to deliver grain as stated in contract

  • Payment is not received until the price is fixed

  • Service charges may be implemented during harvest

  • Open to price risks

  • Grain must be marketed twice

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 basis opportunity at harvest time

  • Premium and service charges may be costly

  • Must market option to add value

  • Lose time value if producer waits until contract expiration is near to market option

  • If market has no movement, premium is wasted

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 in the future. Favorable basis levels are normally achieved when futures are low in comparison to history.

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 title

  • Rewired 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

Deferred Payment Contract

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

Positives:

  • Lock in good market price opportunity for basis gains

  • Can eliminate storage costs and risks when used at harvest

Negatives:

  • Total of grain is transferred upon contracting

  • Potential basis losses if used at harvest or market low

  • Commitment of pricing before desired basis rally (need time)

  • Must market grain a second time

Deferred Payment Contract

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

Positives

  • Deferment of tax liability

Negatives:

  • Very rigid contract - must be to maintain integrity

  • Non reversible in case some last minute expense arises

  • Lose grain title

  • Must depend on financial strength of company

  • Must have firm value of grain established - lose market rally