Marketing Programs 04/30/19 2:42:13 PM|
|At Rt.16 Grain Cooperative we are in business to serve you. Our goal is to help to provide marketing alternatives necessary to maximize your profit potential. Below is information designed to better acquaint you with the marketing alternatives we do offer.|
If you have any questions please feel free to call 217-563-8612, email email@example.com or stop by any Rt. 16 locations, we'll do our best to help.
Seasonal Average Pricing Program
- Pricing begins 5-21-19 and ends 7-13-19
- Equal quanities priced every Tuesday and Thursday on the close
- 16 pricings will be averaged for your final fall price
- Price grain when the average historical seasonal value are at their highest level
- Takes some of emotions out of pricing a portion of your grain
- Fee: .2 cents PER bushel
“Spot” grain is a cash sale at the nearby market price. The market price used is our closing bid, for the current delivery period, on the day the grain disposition is made.
With this alternative the price is not established ahead of time, therefore you are at risk of price fluctuation between the time of delivery and disposition. For example, you bring in new crop corn on a Tuesday in harvest and the nearby bid is $2.10. The corn is placed “on hold” awaiting disposition. On Friday you finish the field and sell out the corn that came in that week. The nearby price has gone down to $2.00 so the corn will be priced out at $2.00.
Cash Sale Contract
In a cash sale contract, you contract to sell a specific quantity of grain at the nearby bid that is satisfactory. The price, quantity, and delivery period are all specified in the contract.
- Price is fixed, you have no further price risk (Market is at a good price level, i.e. market is going lower and basis is good)
- Quality risk after delivery is transferred to the elevator
- Money is available upon completion of delivery (great for moving grain)
- If, for tax reasons, you wish to defer payment, payment can be deferred to a later date at your request.
- Flexibility in pricing and delivery period are eliminated
A Forward Contract is used to lock in a price for grain at a future date. The price, quantity, and delivery period are established in the contract. Any variance in these terms must be agreed upon in advance by the buyer and the seller.
- An attractive price can be locked in for a future delivery period
- You can lock in an attractive “carrying charge” on either farm stored or elevator stored grain
- You can deliver grain at a later date without downside price risk.
- You can plan on the quantity, price, and delivery period according to your needs.
- Downside price moves are avoided. You may avoid a weak harvest price by forward selling
- Grain must be delivered as contracted regardless of market conditions between the time of sale and the time of delivery
- Upside price movement is lost
- You must maintain quality of farm stored grain between the time of sale and delivery
The basis contract locks in a premium (i.e. good basis) level when flat price is not satisfactory. A basis contract allows the seller to maintain SOME pricing flexibility. In a typical cash sale contract the cash price is determined by taking the Chicago Board of Trade (CBOT) futures and adding/subtracting the basis level to it. In a basis contract the quantity, delivery period, and the basis component of the price are established at the time the contract is written. The CBOT price is left open to be established at a later date. At that later date the final price is established by adjusting the CBOT futures price by the previously established basis level.
The basis contract can be used to capture a historically attractive basis level, or to move grain while awaiting a CBOT rally. The futures option month that the contract is to be priced off of is established in the contract, as is the date by which the final price must be established. It MAY be possible to amend the contract to price off of a different CBOT futures contract month to provide you with more flexibility. If this is done, however, the basis level will be amended by the spread between the two contract months, plus a service charge to cover increased interest charges and the additional commission charges incurred by the elevator.
- Downside basis risk is eliminated
- You may take advantage of future CBOT rallies
- You may be able to avoid weak harvest basis levels
- On grain delivered but without the final price fixed you may receive up to an 80% advance
- Quality risk is passed to the buyer upon delivery
- Any future basis improvements are forfeited There is still a downside risk on the CBOT. There is no guarantee that the CBOT must rally after a basis contract is initiated.
- If CBOT levels fall far enough you may have to return part of the advance
- Effective use requires knowledge of local basis tendencies
Hedge to Arrive Contract
The Hedge to Arrive Contract is another method of moving grain while maintaining pricing flexibility. In the Hedge to Arrive Contract the delivery period, quantity, and the Chicago Board of Trade price are established at the time the contract is written, but the basis level is left to be established at a later date (the Hedge to Arrive Contract is the exact opposite of a basis contract). A date by which the contract must be priced is determined and included in the contract terms when it is written. The contract must have it's final price determined by the time of delivery.
- No margin calls or exchange fees, only a service charge built into the contract price
- You can protect against CBOT declines while maintaining the ability to capture basis improvements
- In the event of a crop failure a cancellation charge may be assessed in addition to any market differential.
- Since the CBOT price is set you are unable to take advantage of CBOT rallies
- Requires a familiarity with local basis levels by the seller
- You cannot trade in and out of a HTA contract as you can in a futures contract
A hedge to arrive contract may serve the same function as selling a futures contract, but it is a cash contract and is written with full anticipation of delivery.
Our policy requires placing the underlying futures contract in the same crop year as delivery. No old-crop / new-crop spreads.
Minimum Price Contract
A Minimum Price Contract establishes a guaranteed base price to protect you against lower prices while still permitting participation in a rally. The delivery period, quantity, and minimum price are established in the contract. The upside participation is allowed through the purchase of a futures option by Ludlow Co-op. The minimum price is determined by taking the delivery period cash price and subtracting the option premium and a service charge.
We will work with you to determine the call option month and strike price that best suits your marketing goals.
In any minimum price contract the title passes to the buyer upon delivery. Because of this the grain delivered against a MPC is no longer eligible for a CCC loan.
- Risk of price decline on both basis and CBOT is eliminated
- Upside CBOT profit potential is maintained
- The minimum price is guaranteed and paid in full upon delivery
- Quality risk passes to the buyer upon delivery
- The MPC requires no up front charges, fees, or margin money. They are all built into the minimum price
- Depending on market conditions a MPC might be less than storage or DP charges
Delayed Price Contract
- Delivery is expected, the contract does NOT permit trading in and out of the market
- Costs may be higher than storage or DP, depending on market conditions
- The basis level is locked in, you cannot participate in any basis improvements which may occur
- May require contracting in 5,000 bushel increments
A Delayed Price Contract, (also variously known as No Price Established, Price Later, or Deferred Price Contract), allows you to move grain without establishing any price. The charges for a Delayed Price (DP) Contract are highly variable, changing with current market conditions. Once the DP contract is written, however, those charges are fixed and will not change for that particular contract.
It is important to note that in a DP Contract the title to the grain passes to the buyer upon delivery. You are therefore unable to use DP grain as security collateral for loans. Under current USDA marketing loan provisions you can still receive any applicable Loan Deficiency Payment as of the date of delivery if the prerequisite paperwork is done in advance at the FSA office.
A supplemental, state-mandated, form must be signed and returned in addition to our regular contract confirmation.
The delivery period, service charge, and date by which pricing must be fixed are established in the initial contract.
Service charges are determined by market conditions. They can vary widely, from no charge to levels higher than commercial storage.
- You can make delivery and defer pricing to a later date
- Within established terms you can pick the time you wish to price
- Pricing is separated from the delivery of the grain
- Quality risk passes to the elevator upon delivery
- Corn moisture is based on 15.0%rather than 14.0% on storage
- Basis and CBOT price both remain open
- Basis and CBOT price both remain open
- Dependant on financial stability of the elevator (DP grain is in an inferior creditor position to stored grain)
- This is NOT STORAGE, title passes to the buyer upon deliver
Rt. 16 Grain Cooperative will continue to analyze other marketing alternatives. Our desire is to increase your marketing flexibility through a variety of marketing tools. There are advantages and disadvantages to each. Like other tools there is a time and a place for each and no one works best in all circumstances. Which alternative you choose should depend on current market conditions, your expectations, your comfort level with the particular marketing alternative in question, and the amount of price risk you are able and comfortable in taking.
We will be more than happy to make all the time necessary to talk to you about market conditions, and these contracts, and how they fit into your needs.
We appreciate your business, serving our customers is why we are here!