Commodity Contract Options

Cash Contracts

These contracts allow the grower to lock in the full price for their grain today for either immediate or deferred delivery.

How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period. Grower is paid elevator board price for their grain on the day it is sold.

Cash Contract Advantages:

  • Allows grower to lock in today’s price for their grain
  • If a grower likes next month’s price better, they can lock that in and deliver later
  • Once the price is locked in there is no need to worry about fluctuations in price, the grain is sold
  • Grower knows what they will get paid when their grain is brought in (plus/minus any premiums or discounts)

Cash Contract Disadvantages:

  • Costlier to buy out of, relative to a few other contract types, if unable to deliver grain
  • Cash prices are not always available in later delivery periods
  • Grower is unable to capture any potential gains in futures or basis prices

Hedge-to-Arrive (HTA) Contracts

These contracts allow the grower to lock in a futures price, for futures traded commodities, and price their basis at a later date.

How does it work?
Grower agrees to deliver a certain quantity and quality of grain during a set time period. The producer chooses the futures price level and the basis remains open and un-priced until it is set; on or by the date specified on the grower’s contract with elevator.

HTA Contract Advantages:

  • Lock in the riskiest part of contract price, the futures, while leaving the basis open in hopes for it to improve
  • Enables grower to lock in current futures price for grain at a later delivery date where cash bids may not yet be available
  • Easier/cheaper to buy out of if the crop does not get planted or if production is lower than anticipated

HTA Contract Disadvantages:

  • Grower is unable to take advantage of higher futures prices once the price is set
  • Contract does not offer protection in the event that basis levels drop or remain unchanged

Basis Contracts

These contracts allow the grower to lock in their basis on their contracts but lock in futures later.

How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period. The basis is locked in on the contract at this time. The final price of the contract is determined at a future date, as indicated on the grower’s contract with elevator, by locking in the futures price and adding/subtracting the basis value on the grower’s contract.

Basis Contract Advantages:

  • Allows producer to sell their grain while locking in part of the price, waiting for higher futures levels to lock in the last portion of the price on the contract

Basis Contract Disadvantages:

  • Futures prices are not guaranteed to rise and could instead fall, meaning that the grower is locking in a futures price that is lower than the futures price of the day the basis was locked in

Delayed Price (DP) Contracts

These contracts allow the grower to haul their grain today but to price it by a date established by elevator.

How does it work?
Grower hauls their grain to elevator but does not like the cash price at the time. The DP contract allows the grower to move grain and wait to lock in a price until the contract reaches its expiration date or prices become more attractive and the grower sells.

DP Contract Advantages:

  • elevator assumes risk of storing grain and keeping it in condition
  • Grower can wait to sell grain until price becomes more attractive
  • Grower can haul now and price later

DP Contract Disadvantages:

  • DP Contracts usually have storage charges, which are set by the elevator and based on space availability, rail performance and market conditions
  • Price of grain may be highest when grain was hauled, there is no price protection should the markets take prices lower

In summary, there are many programs out there for you to take advantage of to get some very good prices on your crops. We are in a very tight farming economy presently and some pre-sales can really make a difference between cash flow positive and a very tight year.

Find your break-even costs by knowing how much your inputs are per acre on your corn and beans. Once you’ve done this, speak to a marketing specialist which could be your local grain elevator. There is a program out there to fit your individual goals as a farm operator!

The Gerber State Bank  217.795.2331