Forward Contracting Grains John Hobert Farm Business Management Program Riverland Community College.

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Presentation transcript:

Forward Contracting Grains John Hobert Farm Business Management Program Riverland Community College

What were the Marketing Tools Discussed Last Month? l The Cash Market l The Forward Contract l Hedging l Delayed Pricing l Government Programs: CCC l Options l Animal Feeding

More Marketing Tools. l Sell Cash-Buy Futures l Alcohol Plant Agreements l Speculating No! No! No! l Buy or Sell Orders

Problems in Farm Marketing l Specialization in agriculture leaves the farmer subject to wide shifts in income and pricing of commodities. l The farmer generally needs to cover his costs over an extended period of years if he wishes to be successful. l The supply of food is difficult to keep in balance with the demand of food.

More Problems in Farm Marketing l Farmers lack market power. A few individual farmer have no affect on the big picture throughout the country or world. l Other occupations are more insulated from markets than farming. l 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? l Receive the highest average price during the marketing season as possible. l Achieve the highest maximum profit from your crop as possible. l Control your marketing risk through some good decision making. l Select a marketing technique which is convenient to you as a farmer.

Will marketing goals be the same for all farmers? l A young farmer with considerable capital debt probably needs to take less risk in his marketing plan. l More established farmers may be in a capital position to assume more risk in their marketing plan. l Some farmers may option to select simple marketing methods for convenience.

Advantages of the Forward Contract in General l You lock in a price for future delivery at a certain location. l It is the most widely used and understood of forward pricing alternatives. l It is simple and legally binding. l It usually can be made in any amounts. l There are no margin calls.

More Advantages of the Forward Contract in General l It eliminates second guessing. l It can be tied to a buy/sell order. l You control the amount of risk you wish to assume. l You can target your selling price at your cost of production through some good record-keeping.

Disadvantages of the Forward Contract in General l You have yourself locked in and have thrown away the key. l You have no advantage from a narrow basis position. l You must know your production costs to be successful with this marketing tool. l You will most likely not receive the highest prices for the marketing season.

Where can I Execute a Forward Contract? l Country Elevators. –i.e. Ag Partners, Cannon Valley Coop l Sub-terminal Elevators. –i.e. Continental Grain, GTA l Terminal Elevators. –i.e. Cargill Inc. l Transformation Markets. –Feed manufacturers, processors, exporters.

What Contract Provisions should I be concerned about? l The parties to the contract. l The date of the contract. l The commodity to be exchanged. l The quantity involved in the contract. l How the commodity is to be packaged. l Additional specifications. i.e. grades

More Contract Provisions l The price per unit. l The terms of payment. l The point and method of delivery. l The time for final delivery. l Obligations for accepting and pricing grain downgraded by weather of delays in harvesting, etc.

More Contract Provisions l Penalties for default should also be mutually agreed upon and specified in the contract to prevent any misunderstanding. l Contracts are legal and binding agreements and should always be spelled out in writing.

Forward Contracting Strategy l Cover your input costs by forward contracting a portion of the crop, perhaps 1/3 at or prior to planting. l When the crop is well along, consider contracting another 1/3 of the crop. l 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? l Work within a Farm Management Program to accurately determine my costs of production.(FINPACK) l Develop crop production spreadsheets to determine my costs of production. l Direct your attention at accurate farm records which will improve your overall marketing ability.

l Utilizing FINPACK production cost data. l Utililzing Crop Marketing Plan spreadsheet data. l Utilizing Historical production cost data. A Brief Look at Determining your Crop Production Costs.