Forward Contracting GrainsForward Contracting Grains

John Hobert

Farm Business Management ProgramRiverland Community College

What were the Marketing What were the Marketing Tools Discussed Last Month? Tools Discussed Last Month? The Cash Market The Forward Contract Hedging Delayed Pricing Government Programs: CCC Options Animal Feeding

More Marketing Tools.More Marketing Tools.

Sell Cash-Buy Futures Alcohol Plant Agreements Speculating............No! No! No! Buy or Sell Orders

Problems in Farm MarketingProblems in Farm Marketing

Specialization in agriculture leaves the farmer subject to wide shifts in income and pricing of commodities.

The farmer generally needs to cover his costs over an extended period of years if he wishes to be successful.

The supply of food is difficult to keep in balance with the demand of food.

More Problems in Farm More Problems in Farm MarketingMarketing

Farmers lack market power. A few individual farmer have no affect on the big picture throughout the country or world.

Other occupations are more insulated from markets than farming.

It is difficult for many producers to make a decision on a marketing strategy which is best for them.

What should your marketing What should your marketing goals be at the least?goals be at the least?

Receive the highest average price during the marketing season as possible.

Achieve the highest maximum profit from your crop as possible.

Control your marketing risk through some good decision making.

Select a marketing technique which is convenient to you as a farmer.

Will marketing goals be the Will marketing goals be the same for all farmers?same for all farmers?

A young farmer with considerable capital debt probably needs to take less risk in his marketing plan.

More established farmers may be in a capital position to assume more risk in their marketing plan.

Some farmers may option to select simple marketing methods for convenience.

Advantages of the Forward Advantages of the Forward Contract in GeneralContract in General

You lock in a price for future delivery at a certain location.

It is the most widely used and understood of forward pricing alternatives.

It is simple and legally binding. It usually can be made in any amounts. There are no margin calls.

More Advantages of the More Advantages of the Forward Contract in GeneralForward Contract in General

It eliminates second guessing. It can be tied to a buy/sell order. You control the amount of risk you wish to

assume. You can target your selling price at your

cost of production through some good record-keeping.

Disadvantages of the Forward Disadvantages of the Forward Contract in GeneralContract in General

You have yourself locked in and have thrown away the key.

You have no advantage from a narrow basis position.

You must know your production costs to be successful with this marketing tool.

You will most likely not receive the highest prices for the marketing season.

Where can I Execute a Where can I Execute a Forward Contract?Forward Contract?

Country Elevators.– i.e. Ag Partners, Cannon Valley Coop

Sub-terminal Elevators.– i.e. Continental Grain, GTA

Terminal Elevators.– i.e. Cargill Inc.

Transformation Markets.– Feed manufacturers, processors, exporters.

What Contract Provisions What Contract Provisions should I be concerned about?should I be concerned about?

The parties to the contract. The date of the contract. The commodity to be exchanged. The quantity involved in the contract. How the commodity is to be packaged. Additional specifications. i.e. grades

More Contract ProvisionsMore Contract Provisions

The price per unit. The terms of payment. The point and method of delivery. The time for final delivery. Obligations for accepting and pricing grain

downgraded by weather of delays in harvesting, etc.

More Contract ProvisionsMore Contract Provisions

Penalties for default should also be mutually agreed upon and specified in the contract to prevent any misunderstanding.

Contracts are legal and binding agreements and should always be spelled out in writing.

Forward Contracting StrategyForward Contracting Strategy

Cover your input costs by forward contracting a portion of the crop, perhaps 1/3 at or prior to planting.

When the crop is well along, consider contracting another 1/3 of the crop.

Plan to store the remaining 1/3 of the crop for after harvest delivery with sell orders.

How do I determine my costs How do I determine my costs of production?of production?

Work within a Farm Management Program to accurately determine my costs of production.(FINPACK)

Develop crop production spreadsheets to determine my costs of production.

Direct your attention at accurate farm records which will improve your overall marketing ability.

Utilizing FINPACK production cost data. Utililzing Crop Marketing Plan spreadsheet

data. Utilizing Historical production cost data.

A Brief Look at Determining A Brief Look at Determining your Crop Production Costs.your Crop Production Costs.