Cash Contracts
These contracts allow the grower to lock in the cash price for their grain today for either immediate or future delivery.
How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period. Grower is paid CME board price minus the basis of delivery location 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 another month’s price better they can lock that in for future delivery
· 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, 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 Alliance will charge $0.05 off that futures price. Contract remains un-priced until the basis is set; on or by the date specified on the grower’s contract with Alliance Grain.
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 will lock in futures at a later date.
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 Alliance Grain, 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
· Once basis is established, storage/DP charges stop on those bushels.
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 at a later date established by Alliance Grain.
How does it work?
Grower hauls their grain to Alliance Grain 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 wishes to sell.
DP Contract Advantages:
· Alliance Grain 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 Alliance Grain and based on space availability, market conditions, replacement values, etc.
· Price of grain may be highest when grain was hauled, there is no price protection should the markets take prices lower
Minimum Price Contracts
These contracts establish a floor price for grain through the purchase of a call option, which gives growers the flexibility to capture potential futures market increases.
How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period. The contract sets a minimum cash price by locking in a current market price – less the cost of a designated call option. Call options give the buyer the right, but not the obligation, to own futures at a given strike price level. Call options gain value as the market goes higher, which allows the grower to gain value on the contract as the market works higher above the designated strike price.
Example:
Assume that on May 1st the cash price for October delivery corn is $4.00/bushel ($4.30 futures and a -30 cent basis). The grower, Farmer John, wants to lock in that price for part of his crop, but feels that futures have the potential to trade higher due to weather concerns and does not want to miss out on potential market gains. Farmer John decides to sell his grain on May 1st with a minimum price contract. If a December $4.30 call costs 15 cents on May 1st, Farmer John’s cash price on his contract is written at $3.85 ($4.00 cash price – 15 cent option cost). If December futures increase to $4.80/bushel, Farmer John can exercise his option and his final cash price would increase to $4.35/bushel, which is 35 cents higher than the day he contracted. If December futures decrease to $3.70/bushel, Farmer John’s option would expire worthless and his cash price remains unchanged at $3.85 and Farmer John is out the cost of the option premium (15 cents).
Minimum Price Contract Advantages:
· Contract establishes a floor price while giving the grower the ability to capture rallies in the futures market
· Grower can move his crop to elevator, receive payment on cash contract, reduce grain quality risks, and still participate in market rallies
· Option costs are deducted from the cash price and are not paid out of pocket up front
· Option is in Alliance Grain’s hedge account so there is no need for the grower to set up their own hedge account to have a minimum price contract
Minimum Price Contract Disadvantages:
· Futures prices may not improve before option expiration, meaning the option will expire worthless and the grower is out the premium
· Option premiums can be costly due to volatile futures markets
Accumulator Contracts
This type of contract allows producers to have bushels priced weekly above the current market, if certain conditions are met.
How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period. The contract sets an accumulation price above current market levels and prices weekly at that level as long as certain market conditions are met. Contract includes an Accumulation price, a Knock-out level, and the pricing period. The Accumulation futures level will be above the current market, the knock out level will be below the current market, and the pricing period will be a set amount of weeks. Accumulators can be adjusted to meet grower’s specific requests. Alliance will charge a $0.05 cent investment fee.
Example:
On April 1st, Farmer John receives an accumulator quote from Alliance Grain and sees he can price futures at $4.50 for new crop weekly over the next 35 weeks, as long as futures don’t trade below $3.60, even while new crop futures are currently $4.00. He enrolls 10,000 bu. that will price in equal amounts over a 35 week period April through November. (285 bu. every Friday) If for example at the end of the pricing period, new crop futures are trading at $4.10, Farmer John will still have all 10,000 bu. priced at $4.50 futures for enrolling in the Accumulator contract, so he made at least 40 cents more than the market traded at. If on the last pricing date new crop futures are above his accumulation level at say $4.65, he will have to double-up the bushel amount to 20,000 bu. priced at $4.50 futures accumulation. If halfway through the pricing period (say week 17) futures settle below his knockout level of $3.60, all bushel priced up to week 17 (4,845 bu.) are priced at $4.50 futures, but remaining bushels (5,155 bu.) go back to the farmer unpriced.
Accumulator Contract Advantages:
· Contract can accumulate futures pricing above current market price levels.
· Can add discipline to marketing by pricing weekly, through the swings in the market.
· Options are in Alliance Grain’s hedge account so there is no need for the grower to set up their own hedge account to have an Accumulator contract utilizing options.
Accumulator Contract Disadvantages:
· Futures prices may improve above accumulation level and double up the bushel amount for grower at Accumulation price.
· Futures could trade below Knock out level, and leave a portion of the contract unpriced, with market trading at lower levels.
Average Pricing Program
This type of contract allows producers to have bushels priced weekly over a set number of weeks, typically for new crop delivery.
How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period, usually new crop. The amount of bushels enrolled in the program will be divided by the number of weeks, and that weekly amount will price once per week.
Average Price Contract Advantages:
· Bushels will be priced during the historically high prices for the marketing season
· Can add discipline to marketing by pricing weekly, through the swings in the market.
· There is no cost to enroll bushels into the program
· 100% of bushels enrolled will be priced
Average Price Contract Disadvantages:
· Futures prices may improve at a time outside of the pricing period
· Futures could trade lower within the pricing period