Grain Contracting
Updated 2/21/2010
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Topics Discussed
Contracts/Tools
offered and uses of
those contracts and tools.
Risks
of contracting and not contracting.
Putting
Non
Risks into perspective.
Delivery Buyout with examples.
Positive Marketing Services
Contract
Guidelines
Offer a few GOOD contracts
Offer simple contracts
Avoid unnecessary risks for both parties.
Create a Win/Win environment for customer
and coop
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Available Contracts/Tools
Target/Open
Orders
Forward Contract
Futures Only (HTA)
Basis Contract
Minimum Price
Delay Price
Defer Pay
Unpaid Grain
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Target Order (Open Order)
Grain
always exposed to market
Used when market below your goal
If market moves to your “target” your
order is filled.
Becomes Purchase contract or cash sale
Target
can be canceled anytime prior to
being filled
Great tool for scale in pricing
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Purchase Contract
Contract
that has a specific price for a
commodity to be delivered at a later date
Allows
The
lock in at profitable levels
most common contract done.
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Futures Only (HTA)
Contract that locks in the Futures Price and
leaves basis open to be priced at a future
date.
Useful when you think basis will improve from
current levels or when basis is not being
offered at the time (deferred years).
Two pricing decisions must be made
Fee associated with Futures Only.
Bushel Minimum for certain time periods.
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Basis Contract
Contract
that locks in Basis and leaves
Futures open to be applied at a later
date.
Useful when basis looks attractive for the
delivery period, but you think futures will
improve.
Two Pricing decisions must be made.
Target orders to “final price” the basis
contract is a good idea.
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Minimum Price (Pre Harvest)
Allows
lock in of worst case scenario
while participating in higher markets
should they occur.
Allows approximate worst case buyout in
case of crop failure.
Fee based on Option Cost (Premium)
and Option Fee
5,000 bu Minimum
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Minimum Price Continued
Example: Minimum Price as Price
INSURANCE.
You own a $5.00 KC July Wheat Call Option
$5.00 is your BASE price
IF Futures go to $7.00, your option is “in the money
$2.00, and you can get out of your option, adding
the $2.00 to your price. Becomes regular Purchase
Contract.
IF futures go to $4.00, your option is “out of the
money $1.00, but you do not take $1.00 off of your
minimum price.
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Minimum Price (Post Harvest)
All
features on Pre-Harvest Except:
No buyout needed because bushels are
known
Ownership costs stop. No Storage and you
get your minimum price paid up front.
If prices get better and you re-price, you are
paid the difference.
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Minimum Price Example
Post Harvest
Numbers from Market 2/22/10
$3.62 March Corn Futures
-$0.45 Basis
=$3.17 Cash Price
-$0.26 Bot OTM $3.90 July Call Option(CN=$3.84)
-$0.05 Option Fee……………..
=$2.86 GT Minimum Price
$3.17 Would be Cash Price if Sold on this day. 31
cents more than Min Price.
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Mimimum Price Example
Post Harvest Continued
Get Paid 2.86 for Corn today with no downside
risk.
Stop Ownership Costs
16 cents Storage over 3 ½ months
6 cents interest on 3 ½ months 6% interest
22 cents potential ownership cost savings
-31 cent Option costs
=9 cent total cost with unlimited upside
potential from CN $3.90 and no downside risk
until 6/25/2010.
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Defer Price
Coop
takes ownership of grain in storage
before you sell.
Used to keep the producer from having
to sell to make room for harvest.
Producer pays monthly fee until grain is
sold, sometimes by a pre-determined
time.
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Defer Payment Contract
Can sell and receive money at later date
Premium paid – dependant on rate and length
of time.
Handy for carrying over income into new fiscal
year
Can roll Defer Pay forward, but not backwards.
Example: You have a Defer Pay contract due on
January 1, 2011. You could move payment forward
to June 1, 2011, but not back to December 15,
2010.
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Unpaid Grain
Can
sell and receive money at later date
Can take money whenever you need or
want it.
No Premium Paid
Allows
you to sell Profitably without
knowing your tax situation yet.
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Risks of Contracting
Non
Production – Hail, drought, lease
loss, cost of production, crop rotation
changes, and many more
Prices go higher – Hopefully locked in
profitable prices and have more to sell.
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Risks of not contracting
Unable
to sell at PROFITABLE levels
after harvest.
Pay more marketing costs associated
with not turning grain into money at
harvest.
Cash Flow making you sell unprofitably
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Put Risks Into Perspective
What
was your worst crop ever? 50% of
regular crop? 25%?
Get signed lease agreements
Buy Insurance. Crop insurance may
allow you to feel more comfortable up to
a larger percentage. Price Insurance
(minimum price) may help limit your risk.
Know your risk tolerance
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Non Delivery
In
case of Non Delivery due to lack of
production, Buyout is the only option to
fulfill the contract.
Producer pays CGM 25 cents over the
posted cash price for the grain at that
time.
Bushels are then applied to the contract
and paid for the contracted bushels
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Non Delivery (Cash Price Higher)
Example:
Contract Price
Cash Price
25 cent above Cash
Producer would lose
$3.50
$4.00
($4.25)
($0.75)/bu
Producer
sold at $3.50 and purchased
grain for $4.25 to apply to $3.50 Contract
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Non Delivery (Cash Price Lower)
Example:
Contract Price
$4.50
Cash Price
$4.00
25 cent above Cash
($4.25)
Producer would Gain
$0.25/bu
Producer
sold at $4.50 and purchased
grain for $4.25 to apply to $4.50 Contract
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Disclaimer
Commodity trading is risky and CoMark Grain Marketing LLC assume no
liability for the use of any information contained herein. Neither the
information, nor any opinion expressed shall be construed as an offer to
buy or sell any futures, options on futures contracts, options on cash
grain, OTC products, Cash Grain, or Basis.
Past financial results are not necessarily indicative of future
performance. Any examples given are strictly hypothetical and no
representation is being made that any person will or is likely to achieve
profits or losses similar to those examples.
Information contained herein was obtained from sources believed to be
reliable, but is not guaranteed as to its accuracy. Any opinions
expressed herein are subject to change without notice. Reproduction or
use in any format without authorization is forbidden. All rights reserved