Knowing the ins and out of these four types of grain contracts could help you choose the best deal for your business
Let’s review types of pricing contracts offered by grain companies.
Most grain companies have come up with a number of variations of price averaging contracts, minimum price/options contracts, premium plus and target price contracts.
These innovations in contracting provide you with many different choices, but along with these choices comes more confusion. Choice is always a good thing, but you need to understand your options to make good decisions for you and your farming business.
1. Price averaging contracts
Price averaging contracts offer you the ability to price your grain by taking the average of the daily price over a given period of time — 30, 60, 90 or 120 days or more.
These types of contracts will give you an average price. Some of them offer the ability to price out your contract on any given day so that if you think you have seen a market high for your averaging period, you can cash out your contract and be done.
In my opinion, price-averaging contracts have a tendency of making you sell your grain and then forget it. For some, this may be what you are looking for if you don’t have the time to manage the operations and do all the marketing. But if you want better than average returns for your grain, you need to pay attention to the market and try to lock in a price that will be better than the average offered under these programs.
A number of variations of price averaging contracts are being offered. Do some research and find what will work best for you before committing to anyone.
2. Minimum price/options contracts
Minimum price/options contracts offer you the ability to establish a minimum (or floor) price for your grain while remaining in the market, so if futures values increase you can lock in the higher price.
These types of contracts have very specific time periods, and you will pay a premium — either up front, as a deduction off your net price, or blended into basis.
There is a cost to these contracts because the companies offering them hold all of the pricing risk. The only way for them to protect themselves is by hedging or using options contracts, and all of those come with a cost.
These types of contracts work very well in helping you lock in a guaranteed price for your grains while leaving you the upside potential. But you need to pay close attention to what the markets are doing so you don’t miss good pricing opportunities.
3. Premium plus contracts
Premium plus contracts come with a few variations. Usually the contract offers you a premium when you sign up to deliver some old crop grain, if you agree to sell an equal tonnage of new crop grain to them after harvest.
I have also seen contracts where, once you sign one contract, the company will offer you a premium to sell them a similar amount of another crop (like canola, barley or peas) that they need at that time.
These types of contracts are a good way to make a few extra dollars. I believe that if you cannot deliver the extra grain after harvest due to production loss, there is usually no buyback. If you haven’t pre-priced the grain, you just forfeit the premium.
4. Target contracts
Target contracts allow you to set a delivery period and a price target that the grain company will monitor for you. If the futures and/or basis levels change enough to meet your target price, the company will automatically convert your target contract into a priced contract.
You need to make sure you’re following any target contracts that you have out there. Make sure you aren’t double contracting any of your tonnes, as two companies could trigger a contract on the same day, which could mean you may have to buy back one of the contracts.
Two more tips
This is a very brief and generic summary of some of the different types of contracts available out there in the grain industry. Here are two tips that might also help.
1. Don’t over commit. Most of these different types of contracts offered by the grain companies commit you to delivery. You need to be very careful not to contract too many tonnes; if you end up with a production shortfall at harvest time, you will be required to buy back your shortfall tonnes.
2. Know the costs. Some of these contracts come with an associated cost. Make sure you understand the details and the costs before you commit to anything
To better understand the details of the different contracts offered by the various companies, I advise you go to their websites and review the information. Then call your local company rep, or send me an email if you have any questions.
Now you have some homework to do on those quiet evenings at home. †