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Watertown Co-op Grain Contracts

Watertown Co-op
has a variety of contracts to help manage risk and price volatility. Using a grain contract successfully requires an understanding of how various contracts work, the kinds of risk they are designed to control, and the areas of risk that remain after the contract is signed.

We…can help you make sense of marketing and find the most effective contract solution for your farming operation. Please don’t hesitate to give us a call – that’s why we’re here.

  • Cash Contract
  • Forward Cash Contract
  • Delayed Price Contract
  • Minimum Price Contract
  • Futures Fixed Contract
  • Basis Fix Contract
  • Floored Average Contract™
  • Extended Price Contract
  • Cash Plus Contract
  • Target Range
  • Price Builder


Cash Contract

Execution

  1. Deliver grain to your local elevator
  2. Sell grain at the current bid
  3. Receive payment

Strategy
Use this tool when the cash price has met your objective. The futures and the basis levels may both be at favorable levels or one may be significantly stronger than normal, to compensate for the weaker factor.

Advantages

  • Easy to execute
  • Receive payment immediately
  • Eliminates all risk of price decrease
  • No storage costs or risk

Disadvantages

  • Futures and basis are both locked in
  • Inability to participate in a market rally
  • Delivery required


Forward Cash Contract

Execution

  1. Contact local elevator to lock in cash price for some time frame in the future
  2. Deliver grain as agreed
  3. Receive payment

Strategy
This contract can be used for two different marketing strategies: Use the forward contract to lock in a favorable new crop price before your crop is planted or harvest. The forward contract can also be used to “lock in a carry.” The market may pay more for grain delivered at a later date. If the forward price is greater than the current price plus your storage and interest costs, it would be beneficial to lock in the higher price.

Advantages:

  • Easy to execute
  • Eliminates all risk of price decrease
  • Ability to lock in the carry

Disadvantages

  • Payment is not received until delivery
  • Futures and basis are both locked in
  • Inability to participate in a market rally
  • Delivery is required
  • Potential penalty for cancellation


Delayed Price Contract

Execution

  1. Deliver grain to the elevator
  2. Establish service charge and pricing timeframe for contract
  3. Price at some date in the future
  4. Receive payment at time of pricing

Strategy
This contract does not lock in any component of the price structure. It should only be used when the cash price is expected to appreciate enough to cover all service charges and interest expense.

Advantages

  • Allows pricing flexibility in the futures and basis
  • Delivery and pricing do not coincide
  • Eliminates storage risk
  • Ability to take advantage of carry markets

Disadvantages

  • Title of grain is transferred upon contracting
  • Payment is not received until price is established
  • Delivery is required
  • Interest and service charges accrue
  • Open to futures and basic risk


Minimum Price Contract

Execution

  1. Contact local elevator to establish delivery date, bushel amount, minimum cash price, and final pricing deadline
  2. Deliver grain by delivery date
  3. Receive minimum price payment
  4. Monitor futures market to capture futures price appreciation as allowed by the contract
  5. If futures price appreciates within the specified time, contact elevator to establish final price
  6. Receive any additional payment

Strategy:
This contract should be used when the minimum price meets your price objective or you feel upside price potential is limited. The minimum price portion of the contract allows you to participate in a futures market rally due to unforeseen circumstances.

Advantages

  • Guaranteed minimum price
  • Payment is received when minimum price is established and grain is delivered
  • Eliminates storage and interest costs
  • Pricing flexibility in the futures

Disadvantages

  • Delivery is required
  • May have minimum bushel requirements
  • Unable to participate in basis appreciation


Futures Fixed Contract

Execution

  1. Contact your local elevator to establish a delivery date, bushel amount, futures level, and pricing time frame
  2. Deliver grain as agreed
  3. Establish basis level by pricing date
  4. Receive payment

Strategy:
This contract should be used when the futures price is relatively high and the basis is low. The futures and basis may often move in opposite directions.

Advantages

  • Eliminates downside futures risk
  • Avoids service charges
  • Allows pricing flexibility in the basis

Disadvantages

  • May have minimum bushel requirement
  • Title of grain is transferred
  • Payment is not received until the basis level is established
  • Delivery is required
  • Open to basis risk
  • Requires historical futures and basis knowledge


Basis Fixed Contract

Execution

  1. Contact your local elevator to establish a delivery date, bushel amount, basis level, and pricing time frame
  2. Deliver grain as agreed
  3. Establish futures price by pricing date
  4. Receive payment

Strategy
This contract should be used to lock in a favorable basis level and allow time for the futures market to appreciate. Generally, when the futures are low, the basis will be high.

Advantages:

  • Eliminates downside basis risk
  • Avoids service charges
  • Can eliminate storage costs and risks
  • Allows pricing flexibility in the futures

Disadvantages

  • Title of grain is transferred
  • Full payment is not received until the futures level is established
  • Delivery is required
  • Open to futures price risk
  • Requires historical futures and basis knowledge


Floored Average Contract™

Risk
: Low to moderate, as the producer has a futures floor, with upside potential.
Reward: Moderate, as the producer can gain upside average, but not total rise.

Use when
:

  1. Basis is good
  2. Futures prices are stagnant
  3. Cost is cheaper than put options
  4. Pricing window is appropriate

Advantages

  • Producer sets pricing period and delivery time
  • Producer gets the better of the average price or the minimum price
  • Sets a minimum price for the contract
  • No additional service charges beyond up-front charges
  • Set cash price any time up until time grain is delivered

Disadvantages

  • Subject to market fluctuations
  • Producer will not get highest price
  • Service charge on contract for setting minimum
  • Cost may be prohibitive
  • Producer is subject to basis at elevator


Extended Price Contract

Risk
: Moderate to high. The producer can lose 20% of the cash price or more.
Reward: High, as any gain in futures is directly returned to the producer.

Use when
:

  1. Basis is as good as expected
  2. Market shows upside potential
  3. Producer can accept risk or loss
  4. Futures are low

Calculations Example
Futures month July
Futures price $2.45
Cash grain price $2.10 (-$.35 basis)
20% withholding $0.45
Contract charge $.02
Sell stop @ $2.03 (must be placed)
Cash bushels 4561
Bushels this contract 5000
Cost this contract $2200.00
Extended cash price $1.61
Cash price X Cash bushels
Less cost of this contract
Cash bushels

The contract charge and withholding will be deducted from the producer’s grain check at the time of writing. Producers cannot use an Extended Price Contract on a prior grain sale. Producers will not be allowed to roll the contract to a deferred month.  

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