Grain Contracts
Cash Grain Contracts offered by Cooperative Producers Inc.
Forward & Cash Contracts – The commitment of a specified number of bushels for delivery during a specific time frame and place and at a specific price.
EXAMPLE:
5,000 Bushels Corn
Delivered December 2006
Delivered to Juniata
$2.15 per bushel (The cash price at time sold was figured at the corresponding futures level at the time +/- the basis at that time for the specific delivery time period).
Put-Cash Contracts – The utilization of exchange traded Put Options where a fee is paid by the producer to lock in a minimum price protecting the bushels from negative downward price movements in the market while waiting to price cash bushels. Put premiums increase when prices move lower. Must be done in 5,000-bushel increments. Strike prices (futures levels) can be chosen in 10-cent increments for corn and 20-cent increments for beans.
EXAMPLE:
5,000 Bushels CornDecember Corn Put Strike Price $2.50
Premium of Put Option $0.13
Service Fee for Put Option $0.025
Current Basis $0.23 cents under December Futures (Not locked in and used only to gauge minimum price. Basis is not set until producer actually flat prices bushels.)
So the minimum price would be: $2.50 futures - $0.13 premium fee - $0.025 service fee - $0.23 basis = $2.115 per bushel.
A minimum or floor price is in place while still waiting to flat price bushels in hopes of higher prices.
Guaranteed Minimum Price (GMP) Contracts – The utilization of exchange traded Call Options where a producer pays a fee to lock in a floor price while still having the opportunity to participate in the case of any positive upward movement in market prices. Done after producer has sold (flat priced bushels). Call premiums increase when prices move higher. Must be done in 5,000-bushel increments.
EXAMPLE:
Sold 5,000 bushel of corn (all at once or enough sales to equal 5,000)
Price sold at $2.25
$2.50 Call Premium $0.12
Service Fee $0.025
So the minimum price would be: $2.25 cash price - $0.12 premium fee - $0.025 service fee = $2.105 GMP
A minimum or floor price is in place while still having the ability to benefit from higher prices above $2.50 futures.
Min-Max Contract – The utilization of a combination of exchange traded Put and/or Call Options where the producer pays a service fee to establish a guaranteed price range. Must be done in 5,000-bushel increments. The following is not the only way this can be done, there are others.
EXAMPLE: Producer buys a Put option and sells a Call option.
Put Option Strike $2.50
Call Option Strike $3.00
Put Premium $0.17 (buying so you pay premium) give you right but not obligation
Call Premium $0.12 (selling so you receive premium) you are obligated to sell at $3.00 Futures
Service Fees $0.05 ($0.025 per option)
The result of the above would be as follows:
The minimum price would be $2.50 futures - $0.17 Put premium fee + $0.12 Call premium credit - $0.05 service fee - $0.23 basis = $2.17
The Maximum price would be $3.00 futures - $0.17 Put premium fee + $0.12 Call premium credit - $0.05 service fee - $0.23 basis = = $2.67
So the range is $0.50 ($2.67-$2.17)
Basis Contracts – Used by the producer to lock in a specific Basis for a specific timeframe in order to protect from a widening of Basis. This also must be done in 5,000-bushel increments.
EXAMPLE:
Basis locked in at 5 under the March futures.
At the end of the time frame the Basis widens to 10 under the March.
The producer just gained a nickel by locking in the basis level prior to flat pricing bushels by setting the futures level.
The producer could also lose a nickel if basis would go to option price prior to flat pricing bushels.
Premium Offer Contracts – Producer is paid a premium on cash bushels for a firm commitment on delivery of new crop bushels to the elevator. Premium is not paid until bushels are delivered and settled upon.
EXAMPLE:
A December $3.00 Call is sold for $0.125.
Producer is paid $0.10 a bushel premium ($0.025 fee deducted) for committing delivery of 5,000 bushels at harvest when December futures at the expiration date are $3.00 or higher.
Price is $3.00 futures + $0.10 net Call premium - $0.23 basis = $2.87.
If futures are below $3.00 on the expiration date, the producer will receive the $0.10 net Call premium.
E-Markets Decision Rule Contracts – There are five types of contracts that are each an averaging contract where the producer signs up a specific amount of bushels for a specific time. The main difference in the contracts is the amount of risk the producer is willing to take. During the time frame the program averages the closing Futures price based on the Futures month chosen on which to base the average. At the end of the period the producer’s bushels are priced using the average Futures Prices less current basis less a service fee. The two most commonly used DRC℠ contracts are the Market Index Forward℠ and the Trend Trail℠.
The Market Index Forward℠ is a conservative straight averaging contract. The contract automatically prices equal amounts of grain each trading day at the close of the market once you have determined the quantity and pricing period. This contract will price all the bushels enrolled. The risk to you is that the average price determined at the end of the averaging period is at or below your local loan rate.
The Trend Trail℠ is a moderate risk contract that prices grain at the first downturn following a market rally and helps to prevent the emotion of the moment from delaying pricing decisions. With this particular contract you are able to choose a futures floor. By choosing this futures floor the program will not price bushels unless the market closes above the chosen floor. The risk with this particular contract is future prices do not trade above your chosen floor during your chosen time frame long enough to price all the bushels enrolled in the program. Thus at the end of the time frame you could have unpriced bushels.
Seasonal Index Forward℠ contract (moderate) takes advantage of seasonal price patterns by targeting and automatically pricing grain during periods of historically higher or stronger pricing opportunities.
Trend Track℠ contract (moderate/aggressive) prices grain when the day’s closing market price is within a specific range of a moving average index you determine.
Market Prospector℠ contract (aggressive) takes advantage of significant price rallies by pricing a portion of your grain during significant price rallies based on technical over bought conditions.
Accumulator Contract - We would like to use $2.85 Dec. ’06 corn futures for the contract. Using $2.85 futures minus the current basis,(basis is set when 1 of 3 things happen which ever occurs first 1 you set a basis contract, 2 the knockout price is hit, 3 the end of pricing period) the cash range would be $2.42 - $2.39 depending upon your location’s basis level.
This contract prices grain approximately 15 cents above the current market price when it starts and will continue pricing grain at this same level unless the market price drops by approximately 15 cents. If the market price drops by approximately 15 cents this contract will stop pricing bushels. A specific time frame (usually 25 weeks) is involved and this contract will price bushels weekly using an average bushels per week with the number of bushels you put in this contract divided by the number of weeks involved.
If the market price increases by approximately 15 cents above the current market value, the weekly bushels priced will double at the established price. This contract works similar to forward contracting bushels over a number of weeks that starts at a price above the market and this is also ceiling price. There is a two-cent fee charged on bushels that get sold using this contract.