Grain Contract Glossary

FC BASIS CONTRACT
FC CASH GRAIN SALE CONTRACT
FC DEFERRED PAYMENT CONTRACT
FC FORWARD CONTRACT
FC OFFER CONTRACTS
FC PRICE LATER CONTRACT
FC BASIS LATER CONTRACT
FC MINIMUM PRICE CONTRACTS
FC STORAGE CONTRACT

FC BASIS CONTRACT

A basis contract allows you to deliver grain while maintaining some pricing flexibility. It is useful to either capture a historically narrow basis level or move grain while awaiting an expected CBOT rally. The delivery date, quantity, and basis are all established in the contract. The basis is a price level given in cents per bushel above or below the CBOT futures for a specified futures month. The final price is set by fixing the CBOT level during CBOT trading hours.

Basis contracts must be priced before the CBOT delivery month begins (Example: A contract based on the March futures should be priced by the last business day of February). With the prior approval of Farmers Co-op, a basis contract can be rolled forward to another contract month to offer more pricing flexibility. The basis will be amended by the spread between the two futures months plus a small service charge.

Customer Advantages

Down side basis risk is eliminated.
May take advantage of future CBOT rallies.
May avoid a weak (Harvest) basis or low flat price.
Can receive an advance of 75% of contract value. (ex. 2.00 cash price - advance 1.50 per bu)
Quality risk passes to buyer.
Avoids storage or price later charges.
No minimum bushel requirements.

Customer Disadvantages

Future basis improvements cannot be realized.
You remain subject to the risk of changes in the CBOT futures prices.
Requires knowledge of local historical basis.
There is risk in FC asking for additional equity in case cash values fall below advancement levels.

FC CASH GRAIN SALE CONTRACT

In a cash sale contract, you can contract to sell grain at the nearby bid or cash market. The delivery period, quantity, and price are all determined in the contract.

Customer Advantages

Quantity and Price is fixed with no further price risk.
Quality risk is passed to buyer.
Money is immediately available.

Customer Disadvantages

Pricing flexibility and delivery are eliminated.
No chance for further price increases.

FC DEFERRED PAYMENT CONTRACT

A deferred payment contract allows the customer to take income in the tax year that best fits personal financial requirements and cash flow needs. The agreement corresponds with other contracts (Spot, Forward, Basis, etc) and sets the date and amount of payment. The title to the grain passes to the buyer at the time of delivery. No storage charges or other fees are incurred.

Customer Advantages

Payment is received in tax year of choice.
Payment can be designated to correspond with cash flow needs.
No storage charges or service fees apply.

Customer Disadvantages

Payment date is contracted and monies are held by buyer.
Payment is dependent on the financial stability of the buyer.

FC FORWARD CONTRACT

The forward contract is used to lock in a price for grain to be delivered at a future date. The delivery period, quantity, and price are established in the contract. Any variance from the contracted terms must be agreed upon in advance by the buyer and seller.

Customer Advantages

Good market prices can be established when grain in not available for immediate delivery.
Quality, Price, and Delivery can be planned and executed according to your needs.
Income can be deferred.
Simple and easy to use.

Customer Disadvantages

Grain must be delivered as contracted regardless of yield or quality concerns.
Not able to participate in any further improvements in either basis or futures.
Payment is not received until grain is delivered.

FC OFFER CONTRACTS

Offer contracts are used to place orders to sell specific bushel amounts at a pre determined offered price. Offer contracts have a delivery period set to them, and can be used for grain in storage or grain to be delivered off the farm. Offer’s can be set for any amount of time, from a day offer, to many months at a time.

Customer Advantages

Price targets can be reached if you are not able to monitor the markets minute by minute.
Takes advantage of short lived day rallies if your offer is in the quote system.
If you have a price goal in mind, it puts it in writing and gives you something to watch and monitor.
Any price amount and bushel quantity can be offered.
Offers can be used to price cash, storage, or new crop delivery grain.
Offer to sell may be cancelled by seller anytime providing notice has been received by buyer prior to offer being filled.

Customer Disadvantages

Grain will be priced at offer, and if market rallies past the set offer, additional gains will not be realized.
Putting offers to sell at even dollar amounts can sometimes be costly, ex. Offer to sell $2.00 corn, and price is $1.99, then market falls to $1.50. Failure to "pull the trigger."

FC PRICE LATER CONTRACT

A price later contract (also known as a Delayed Pricing or No Price Established Contract) allows you to move grain without establishing any price. Charges vary with market conditions. It is important to note, that unlike storage, title to the grain passes to the buyer upon delivery. You will not be able to use Price Later grain as collateral for government loans or Loan Deficency Payments (LDP).

The service charges are based on market differentials (carries/inverses) and may or may not be less than storage charges.

Customer Advantages

Can make delivery while avoiding historically low (harvest) prices.
The emotionalism of pricing is separated from the physical handling of the grain.
Do not need on farm storage and price later may be cheaper than commercial storage.
Quality risk passes to buyer upon delivery.
On Free Price Later, it allows producer to move grain when they have time and then they can sell it in any bushel amount when they decide.
Corn is shrunk to 15% moisture vs. 14% on storage and warehouse receipts.

Customer Disadvantages

Subject to basis and CBOT price risk.
No payment until contract is priced.
This is not STORAGE! Title passes to buyer and you are unable to get a CCC loan or LDP once put into Price Later.

FC BASIS LATER CONTRACT

A basis later contract allows the farmer to set the CBOT futures price now and establish the basis at a later date. This allows the farmer the ability to sell grain in deferred months and take advantage of higher futures markets.

Basis later contracts must be priced by the 20th day of the month previous to the first day of the delivery month. (Ex. For March delivery, basis must be set by Feb. 20)

Customer Advantages

Downside future risk is eliminated.
May take advantage of basis rallies.
The farmer is not responsible for margin calls.
May avoid a weak (harvest) basis or low flat price

Customer Disadvantages

Upside futures grain cannot be realized.
You remain subject to the risk of changes in the basis prices.
Requires knowledge of local basis.
Increments of 5000 bushels required
No rolling of contracts beyond current market year.

FC MINIMUM PRICE CONTRACTS

A minimum price contract establishes a guaranteed base price protecting you against lower prices, but permits participation in a rally. The delivery period, quantity, and minimum price are established in the contract. The minimum price is simply determined by taking the cash or forward contract price and subtracting the premium and service charge. (With help from Farmers Co-op Grain Marketing department, you determine the option month and strike price that best suits you to establish your minimum price).

Title to the grain passes to the buyer upon delivery. The delivery period, quantity, and minimum price are established in the contract.

Customer Advantages

Risk of price decline for both basis and CBOT is eliminated.
Upside CBOT potential is not restricted.
The minimum price is guaranteed and paid in full upon completion of delivery.
Requires no up front charges, fees, or margin money.
May cost less than commercial storage rates.
Quality risk passes to buyer upon delivery.
Premiums are based on CBOT traded future options.
Very safe and the costs are easily identified.

Customer Disadvantages

Does not permit trading in and out of markets as delivery is expected.
Depending on option prices and volatility, it may cost more than storage rates.
The basis is locked in so one cannot participate in further basis improvements.
Requires selling 5,000-bushel increments.
Pricing must be done before deadline or premium is forfeited.

Minimum Price Example
Current FC Bid for O/N $2.20 (May 1)

Most of our minimum price contracts are based on purchasing a call option and subtracting the cost of the call option from the flat price bid. Your first decision is to decide on the amount of "Insurance" or premium you are willing to spend. As the attached sheet shows, there are numerous option months and strike prices that you can choose. You should base your decision on the amount of money you can afford to spend and the amount of time you want coverage. As you can see, generally, the longer the time frame you are seeking coverage, the more the option will cost.

In this example, we will assume the producer wants coverage over the summer months to cover a planting or drought scare and can afford to spend up to .16 per bushel. Therefore, we will choose a December 2000 $2.90 strike price call which cost .16. The producer's minimum price will be:

Current Bid for October/November: $2.20
Less Cost of Call $0.16
Service Charge $0.01
Minimum Price Contract $2.03

Now, between May 1st and November 20th, you basically “own” the Dec ’00 2.90 call. You now have until the middle of November to sell the call and collect the market value of the call. This value will be added to the minimum price of your contract.

Factors you should consider when writing a minimum price contract:
The price you are willing to pay for the call. The option month and strike price. Volatility of the options and futures markets. The basis you are locking in. The potential/historical basis if you stored the grain and sold it at a later date. Costs of storing the grain. Ex. Storage rates, Interest, Quality, Insurance, etc.

FC STORAGE CONTRACT

This option allows you to deliver grain while maintaining ownership. We warehouse your grain, guaranteeing the quality of that grain. Stored grain is upgraded to quality standards to insuring long-term storability. Grain delivered below these standards are discounted and upgraded. You can get a warehouse receipt allowing you to place it under CCC loan or use it as collateral for conventional loans.

Customer Advantages

Producer maintains title to the grain.
Risk of Quality passes to the warehouseman.
Can avoid selling at the historically low (Harvest) prices.
Storage may be used as loan collateral and warehouse receipts are available.
After paying all warehouse charges, you could haul your grain out of the warehouse.

Customer Disadvantages

Storage costs may be higher than market spreads or other sales strategies.
Discounts and storage charges have to be paid in advance to receive warehouse receipts.