Transcript Grain Marketing

Forward Contracting Grains
John Hobert
Farm Business Management Program
Riverland Community College
What were the Marketing
Tools Discussed Last Month?
The Cash Market
 The Forward Contract
 Hedging
 Delayed Pricing
 Government Programs: CCC
 Options
 Animal Feeding

More Marketing Tools.
Sell Cash-Buy Futures
 Alcohol Plant Agreements
 Speculating............No! No! No!
 Buy or Sell Orders

Problems 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
Marketing
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
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
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
Contract 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
Forward 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
Contract 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
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
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 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 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 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
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.

A Brief Look at Determining
your Crop Production Costs.
Utilizing FINPACK production cost data.
 Utililzing Crop Marketing Plan spreadsheet
data.
 Utilizing Historical production cost data.
