The odds favor spring time pre-harvest sales. This tends to hold true even if prices are low in the spring. Futures and Options offer flexibility in making pre-harvest sales, but for a variety of reasons many prefer to only use the cash market contracts to make early sales.

Forward Contract sales for fall or winter delivery (also sometimes called cash delivery or price purchase contracts) have been around a long time, are simple and are the most often used cash market contracts. You simply contract to deliver a specific quantity and quality of grain at a guaranteed cash price (before discounts or premiums). You are obligated to deliver the quantity at the contracted price regardless of what happens to prices or your production.

In the past few low price years, forward contracting on small spring rallies and then collecting a significant LDP at delivery when market prices were lower has produced net prices above loan price. However, there is a risk in this strategy because you are actually speculating on lower prices and expecting the LDP to enhance your contract price. If you contract when prices are below CCC loan price and market prices end up above loan price, you would be stuck with a price below loan rate and no LDP!

The minimum price contract allows you to set a minimum cash price on a specified quantity and quality of grain that you are obligated to deliver. It can avoid the forward contract risk of missing out on higher prices. If market prices are higher at delivery time, you can ignore the minimum price and sell at the higher market price. The elevator uses options in order to offer this contract and, to cover their costs, charge you a premium. If the markets are volatile, these premiums may become expensive and unattractive.

In recent years a number a variations of both the forward or minimum price contracts have been introduced. Hedge-to-Arrive (sometimes called No-Basis Established) contracts allow locking-in a futures price on cash grain obligated to be delivered. Customized Minimum Price, Profit Range or Min-Max Contracts all offer various price-protecting strategies with reduced premium costs based on various options strategies used by the elevator. Flex Hedge or Flex Hedge-to-Arrive Contracts allow for selective futures hedging strategies to be done using cash contracts. Some contracts may offer crop failure protection.

The variety of cash contracts can provide flexibility to take advantage of early season opportunities while dealing with risk and low prices. However, some of the newer cash contracts are complicated and you really need an understanding of futures and options to better understand how they work. It could be argued that, if you understand them, you might have more flexibility and manage risk better by doing the options (futures) transactions yourself and avoid being required to deliver grain. Their main advantages may be that they can often be done in quantities that don't match Board of Trade contract amounts and they usually don't require up-front cash. ---Melvin

Decisive Marketing - March 9, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010309.html -- Revised: April 20, 2004
breesm@missouri.edu