This publication explains risk-management features of various grain contracts and important business practices needed for successful contracting. Common types of contracts include forward cash, basis, delayed price, minimum price, maximum price (for feed purchases), and hedge-to-arrive contracts. Acrobat Reader required.
A contract is usually defined as a written or oral agreement between two or more parties involving an enforceable commitment to do or refrain from doing something. In agriculture, contracts between farmers and agribusinesses specify certain conditions associated with producing and/or marketing an agricultural product. By combining various market functions, contracting generally reduces participants' exposure to risk. Acrobat Reader required.
Cash forward grain contracts are subject to some aspects of commercial law. Commercial laws are generally the same across all jurisdictions. These uniform laws have developed as a result of the increased complexity of business transactions and the conduct of those transactions across state lines. Acrobat Reader required.
Goals and objectives: (1) learn about the merchant's confirmatory memo rule; (2) learn about issues related to crop casualty caused by the weather; and (3) understand the rights of farmers when the buyer fails to meet financial obligation. Acrobat Reader required.
Basis Contract USDA, Risk Management Agency, September 1997, Media Type: factsheet
A basis contract transfers the basis risk and opportunity from the seller to the buyer on the date of the contract. The producer has eliminated the "basis" part of price risk, but has retained the futures risk.
Basis contracts are marketing instruments that establish the basis (the difference between the local cash price and futures price) used to determine the price paid for grain or soybeans at a later time. Basis contracts let a producer lock in a basis that he or she believes is more favorable than one that will exist later. Acrobat Reader required.
A deferred price contract provides the seller the opportunity to deliver and transfer ownership on the contract date, but without setting a sales price. The buyer generally charges an up front or monthly fee. The producer retains the basis and futures price risk and opportunity in this contract until the sales price is determined.
A hedge-to-arrive contract permits the seller to set the futures level on the contract date, but the basis level is determined by the seller at a later date. The contract transfers the futures risk and opportunity from the seller to the buyer on the contract date.
Hedge-to-arrive (HTA) contracts came into use in the western Corn Belt in the early 1990s, but have been used much longer in the eastern Midwest. Acrobat Reader required.
The Minimum Price Contract Mark Waller, Steve Amosson, Mark Welch and Kevin Dhuyvetter, Texas Agricultural Extension Service, October, 2008, Media Type: factsheet; curriculum, (5 pages).
Like any marketing tool, the minimum price contract has advantages and disadvantages. The advantages include; locks in a minimum price but has upside potential, provides some leverage in obtaining credit, establishes a price floor and helps in production management decisions, no need to deal directly in futures or options markets, no margin calls. Acrobat Reader required.
Goals and Objectives: (1) learn what a minimum price contract is and how it is constructed, (2) learn the advantages and disadvantages of minimum price contracts, (3) learn how selecting different call strike prices will impact the price floor and upside potential of a minimum price contract. Acrobat Reader required.