GRAIN DIVISION
Marketing Tools

Farmers Cooperative Elevator Company offers the following marketing tools
Please feel free to stop in or call us to discuss any of these marketing contracts.

Cash Sale

 

Execution:

  1. Deliver grain to your local FCE elevator
  2. Sell grain at the current bid
  3. Receive payment

Strategy:
Use this tool when the cash price has met your objective. The futures and the basis levels may both be at favorable levels or one may be significantly stronger than normal to compensate for the weaker factor.


Advantages:

  • Easy to execute
  • Receive payment immediately
  • Eliminates all risk of price decrease
  • No storage costs or risk

Disadvantages:

  • Futures and basis are both locked in
  • Inability to participate in a market rally
  • Delivery is required
Forward Cash Contract

Execution:

  1. Contact FCE local elevator to lock in cash price for some time frame in the future
  2. Deliver grain as agreed
  3. Receive payment

Strategy:
This contract can be used for two different marketing strategies:

  1. Use the forward contract to lock in a favorable new crop price before your crop is planted or harvested.
  2. The forward contract can also be used to "lock in a carry." The market may pay more for grain delivered at a later date. If the forward price is greater than the current price plus your storage and interest costs, it would be beneficial to lock in the higher price.

Advantages:

  • Easy to execute
  • Eliminates all risk of price decrease
  • Ability to lock in the carry

Disadvantages:

  • Payment is not received until delivery
  • Futures and basis are both locked in
  • Inability to participate in a market rally
  • Delivery is required
  • Potential penalty for cancellation

Delayed Price Contract

Execution:

  1. Deliver grain to your local FCE elevator
  2. Establish service charge & pricing time frame for contract
  3. Price at some date in the future
  4. Receive payment at time of pricing

Strategy:
This contract does not lock in any component of the price structure. This contract should only be used when the cash price is expected to appreciate enough to cover all service charges and interest expense.


Advantages:

  • Allows pricing flexibility in the futures and basis
  • Delivery and pricing do not coincide
  • Eliminates storage risk
  • Ability to take advantage of carry markets

Disadvantages:

  • Title of grain is transferred upon contracting
  • Payment is not received until price is established
  • Delivery is required
  • Interest and service charges accrue
  • Market must appreciate or develop a carry (prices higher for later time frame)
  • Open to futures and basis risk

Futures Fixed Contract

Execution:

  1. Contact your local FCE elevator to establish a delivery date, bushel amount, futures level, and pricing time frame
  2. Deliver grain as agreed
  3. Establish basis level by pricing date
  4. Receive payment

Strategy:
This contract should be used when the futures price is relatively high and the basis is low. The futures and basis may often move in opposite directions.


Advantages:

  • Eliminates downside futures risk
  • Avoids service charges
  • Can eliminate storage costs and risks
  • Allows pricing flexibility in the basis

Disadvantages:

  • May have minimum bushel requirement
  • Title of grain is transferred
  • Payment is not received until the basis level is established
  • Delivery is required
  • Open to basis risk
  • Requires historical futures and basis knowledge

Basis Fixed Contract

Execution:

  1. Contact your local FCE elevator to establish a delivery date, bushel amount, basis level, and pricing time frame
  2. Establish futures price by pricing date
  3. Deliver grain as agreed after pricing
  4. Receive payment

Strategy:
This contract should be used to lock in a favorable basis level and allow time for the futures market to appreciate. Generally, when the futures are low, the basis will be high.


Advantages:

  • Eliminates downside basis risk
  • Avoids service charges if futures are priced
  • Can eliminate storage costs and risks if futures are priced
  • Allows pricing flexibility in the futures

Disadvantages:

  • Futures must be set prior to delivery
  • Full payment is not received until the futures level is established
  • Delivery is required
  • Open to futures price risk
  • Requires historical futures and basis knowledge

Extended Price Contract

Risk-Moderate to High. The producer can lose 20% of the cash price or more.

Reward-High, as any gain in futures is directly returned to the producer.

Use when:

  1. Basis is as good as expected.
  2. Market shows upside potential.
  3. Producer can accept risk or loss.
  4. Futures are low 

Calculations: Example                                                                    

Futures Month July  
Futures Price $2.45  
Cash Grain Price $2.10 (-$.35 Basis)  
20% Withholding $.42  
Contract Charge $.02  
Sell Stop @ $2.03 (Must be placed)  
Cash Bushels 4561  
Bushels this contract 5000  
Cost this contract $2,200.00  
Extended Cash Price $1.61  

Cash Price X Cash Bushels
Less Cost of this contract
¸ Cash Bushels 

The Contract Charge and withholding will be deducted from the producers grain check at the time of writing. Producers cannot use an “Extended Price Contract” on a prior grain sale. Producers will not be allowed to roll the contract to a deferred month.

Works like a Basis Fixed Contract while avoiding service fees and additional discounts.

Minimum Price Contract

Risk- Minimal, as the producer knows the cost up front to enter into the contract.

Reward- Moderate, as options bought will not follow futures prices tic-for-tic.

 

Use when:

  1. Producers need to sell grain for cash flow needs, but the market shows upside       potential.
  2. Basis is relatively good.
  3. Calculated price is above loan rate.
  4. Futures prices are good. 

Calculations Example

            Futures Month            _______________                  December
 
            Futures Strike Price     _______________                  $2.20
 
            Cash Grain Price         _______________                  $1.76   (-$.44 Basis)
 
            Call Option Premium  _______________                  $.08
 
            Contract Charge/Bu.   _______________                  $.02
 
            Total Cost/Bu.             _______________                  $.10
 
            Cash Bushels               _______________                  9,938
           
            Bushels this contract   _______________                  10,000
 
            Cost this contract        _______________                  $1,000.00
 
            Minimum Price            _______________                  Cash Bushels X Cash Price
                                                                                                Less Total Cost this contract
                                                                                                ¸ Cash Bushels

 

The cost will be deducted from the producers grain check at the time of writing. In the event a producer wishes to “Minimum Price” a prior grain sale, they will be required to pay the total cost upon entry in to the option position.

Floored Average Contractâ„¢

Risk-Low to Moderate, as the producer has a futures floor, with upside potential. 

Reward-Moderate, as the producer can gain upside average, but not total rise.   

Use when:

  1. Basis is good.
  2. Futures prices are stagnant.
  3. Cost is cheaper than put options.
  4. Pricing window is appropriate. 

Advantages:

  • Producer sets pricing period and delivery time.
  • Producer gets the better of the average price or the minimum price.
  • Sets a minimum price for the contract
  • No additional service charges beyond up front charges 
  • Set cash price any time up until time grain is delivered

Disadvantages:

  • Subject to market fluctuations
  • Producer will not get highest price
  • Service charge on contract for setting minimum
  • Cost may be prohibitive 
  • Producer is subject to basis at elevator