Grain Marketing Options
Success Starts with Risk Management
Why Have a Risk Management / Marketing Plan?
- A plan that’s mapped out ahead of time can allow you to confidently execute decisions when the market allows.
- Expenses, break-even, profit expectations, and other components that may affect your operation are already broken out.
- Have a set dollar figure for expected/projected profit, not just as much as possible.
- Provide clarity and eliminate the noise when marketing grain.
Understanding Basic Cash Grain Contract AlternativesThe following information is provided by Key Cooperative to assist grain producers in better understanding, selecting and utilizing the various cash grain contracts and credit sale contracts that Key Cooperative offers. Key Cooperative is committed to helping our producer-owners capture increased value when marketing grain and managing price risk at acceptable levels to their individual business needs.
THE CASH GRAIN FORMULA:
FUTURES +/- BASIS = CASH PRICE
It’s important to know this basic formula to be able to understand and utilize the various cash grain contracts that Key offers.
The futures price comes from the CME (Chicago Mercantile Exchange) which was previously known as the CBOT (Chicago Board of Trade). The CME is a commodity futures exchange which was established in 1848. The basis is the difference between the futures price and your final cash price. The basis consists of transportation costs, handling and storage costs, interest costs, supply and demand fundamentals, local conditions and other relevant factors.
Contract Options Available at Key:
Both the futures and basis portions of the formula are determined in a single decision, simultaneously. This contract allows the producer to capture and lock in the elevator’s or end-user’s price for a specific delivery time frame. When used prior to harvest, the contract is typically created when the producer is satisfied with the price, wants to assure cash flow, or wants to save on storage and shrink costs. Post-harvest purchase contracts are usually used when the price in the future has appreciated enough over the current cash price to cover storage and interests costs. Fees: There is no fee to write this contract.
Also known as an “HTA or Futures Only Contract” locks in only the futures price portion of the cash price. Once the basis is set, both parts are fixed and a purchase contract is created. A No Basis Established Contract should only be used when the producer is fully satisfied with the futures price level, but is not ready to finalize the basis which sets the delivery time frame and delivery location. Fees: $.03 for old crop corn and $.05 for old crop beans – Rolls are an additional $.02. Fees for 12+ months out: $.05 on corn and $.07 on beans – Rolls are an additional $.02. Fees for 24+ months out: $.07 on corn and $.09 on beans - Rolls are an additional $.02.
This contract establishes or fixes only the basis portion of the cash price but leaves the futures price decision open. Once the futures are established, both parts are locked in and a Purchase Contract is created. A Basis Only Contract should only be used when the producer is fully satisfied with the basis but is not ready to finalize the futures. Fees: No charge if the basis contract is priced before delivery. There will be a $.03 per bushel service fee if the contract hasn't been priced by the day of delivery. Rolls are an additional $.02.
This contract is executed by initializing a Purchase Contract and, at the same time, purchasing a call option which acts like price insurance. The minimum price is established by subtracting the call option premium cost from the purchase contract price. This contract locks in a cash price floor while maintaining an opportunity to improve your net price. Additional income may be captured if the Chicago futures contract linked to the call option increases in value before the call option expires. Fees: There is a $.03 per bushel, one-time fee to write this contract.
The producer defines a set amount of grain to be sold at a specific desired price. The bushels will be evenly divided and sold at a predetermined price level or better on every Wednesday over a set number of weeks. If the price on Wednesday of any given week is not at the desired price level set by the producer, no grain will be sold. However, the no sale weeks will be kept track of and unsold bushels will be sold if and when the cash price rises to or above that level on a following week. If the trigger level is set above the current cash market, there is no guarantee that any bushels will be sold over the life of the contract. The producer does have the option to sell a set amount of bushels on the same day every week over a set number of weeks with no minimum price established, therefore guaranteeing a sale weekly. Fees: There is no fee to write this contract.
This contract allows you to sell grain above the current futures level with some stipulations.
• Each week the referenced futures contract settles at or below the accumulation level, 100% of the weekly quantity is priced at the accumulation level.
• Each week that the referenced futures contract settles above the accumulation level, 200% of the weekly quantity is priced at the accumulation level.
• If on any date between trade date and end date, during the electronic or non-electronic regular exchange daily session, the referenced futures contract trades or settles at or below the knock-out level, accumulation ceases. Any bushels already accumulated will continue to exist at the accumulation level.
Fees: There is a $.04 per bushel, one-time fee to write this contract.
This contract is executed by initializing a Cash Price Contract and at the same time going long a Chicago futures contract. Similar to the Minimum Price Contract, the Extended Price Contract provides you additional time to capture upside futures potential. Unlike the Minimum Price Contract, you don’t incur the cost of the call option purchase. The risk/reward here is that without incurring the call option premium cost, you don’t set yourself a price floor, and thus are open to futures downside risk as well. Fees: There is a $.03 per bushel one-time fee to write this contract.
This contract is initiated with a Cash Sale Contract and then tied to a call option sale. The premium received from the call option sale is then added to the Cash Sale Contract. The offer portion of this contract is tied to the strike price of the call option sold. If, on the last day of trading for that options futures month, the current price is at or above the call option strike price, you then need to deliver a second equal portion of bushels at that strike price (+/- the basis). If, on the last day of trading for that options futures month, the current price is below the call option strike price, then no further delivery obligations are necessary. Regardless of whether you end up delivering a second portion of bushels or not, you retain the premium from your call option sale. Fees: There is a $.02 per bushel fee to write this contract and an additional $.02 per bushel fee if your strike price offer is triggered.
Advantages of Marketing Grain through Key
Key’s FOB and Direct Ship programs provide access to all markets.
- Key Cooperative offers a Free-On-Board (FOB) Program. This grain marketing option is designed to help you increase your truck power and capture markets you previously may not have had access to. The Key Cooperative FOB Program quotes you a competitive custom bid for picking up grain at your farm. The bid will reflect the best value based on the relevant end-users within your trade area. Your quoted net price has a deliver charge figured in.
- Key has a fleet of company trucks in addition to independent haulers that can increase a producer’s truck power and insure grain is picked up and delivered on time.
- Key may pass through a DPAD tax deduction, domestic production activities deduction, (Section 199) on all corn and soybeans sold through Key Cooperative. Amount will vary year to year. This is a deduction that only cooperatives can pass on to their customers.
- Grain payment may be deferred to the next tax year through Key.
- Producer is guaranteed to get paid regardless of the End-Users financials when grain is sold through Key Cooperative.
- Free access to field marketing specialists that can assist producers in managing their offers and overall grain portfolio with the flexibility of using a combination of Key’s various cash grain contract and credit sale contract offerings
- If grain contracted through Key Cooperative for direct ship or farm pick up to an end-user is too wet, Key will give the producer the flexibility to deliver to a Key Cooperative location. We simply adjust for the difference in basis on the day it was contracted.