Grain Marketing

A Basis Contract is an “unpriced contract.” This type of contract is similar to a Priced Contract in that the type of grain, quantity, quality, delivery period, and terms of sale are established. The difference is that a “basis” is established, instead of a flat price. The basis is the difference between the paying price for grain and a specific futures month (cash price – futures price = basis). A notable characteristic of a Basis Contract is that its final price may be significantly different from the price being paid for grain delivered at the time of pricing. No additional charges are associated with a basis contract other than brokerage costs for rolling a basis forward to deferred futures months. 

Advantages:

• Seller participates in price increase. 
• Upon delivery, seller can receive a partial advance.
• Eliminates basis risk.
• Upon delivery, eliminates storage-related problems.

Disadvantages: 

• Seller has risk of price decrease.
• Seller cannot realize basis improvement. 
• Title transfers to the buyer.
• Seller may be subject to margin calls.

A “No Price Established Contract” (NPE) is also an unpriced contract. As with a Basis Contract, the type of grain, quantity, quality, delivery period, and terms of the sale are established. The NPE is different from a Basis Contract in that price is set at the elevator’s bid on the day of pricing, no free advance is given and a fee may be charged. Prevailing and anticipated market conditions may require that a fee be associated with a NPE Contract.  If required, the fee is set forth in the terms of the contract and the seller is protected against subsequent increases. Since fee levels change with market conditions, the seller should compare the benefits and cost of a NPE Contract with other marketing and storage alternatives. A major benefit in using a NPE Contract is that it can later be changed into a basis contract or minimum price contract. A NPE provides greater long-term flexibility than a Basis or Minimum Price Contract. 

Advantages: 

• Seller benefits from price and basis improvement.
• Upon delivery, eliminates storage-related problems.

Disadvantages: 

• Seller has a risk of price decrease. 
• Title transfers to the buyer.
• There can be a service charge.

This is the most frequently used grain contract. The contract is made when the buyer and seller agree on price, quantity, quality, delivery period, and other specific terms that apply to the contract. With a “Priced Contract,” the seller has no additional responsibility beyond delivery of the contracted quantity of grain during the set delivery period. The delivery period may be for the next few days or it may be for a deferred period of up to one year away. A change in market price has no effect on the terms or price of the original contract.

Advantages: 

• Seller receives payment upon delivery.
• Seller does not encounter storage or other charges.
• Seller is protected against price decline. 

Disadvantage: 

• Seller does not participate in a price improvement.

A Minimum Price Contract is a grain marketing alternative that combines a priced contract with an agricultural option. It’s like a Priced Contract, except the seller is able to gain from a subsequent price increase. The seller will receive any additional price increase upon final pricing.

Advantages: 

• Guarantees a minimum selling price.
• Does not limit price improvement.
• Upon delivery, eliminates storage-related problems.
• Immediate cash upon delivery.

Disadvantage: 

• Service charge is deducted from the elevator’s paying price.

A Maximum Price Contract works like a Minimum Price Contract but it allows a buyer of grain to participate in a price decrease. In effect, you can purchase your grain and still have the ability to benefit from a price decline. 

Advantages:

• Guarantees a maximum buying price.
• Buyer benefits from price decline.

Disadvantage:

• Service charge is added to elevator’s selling price.

An Open Basis Contract is used when a buyer or seller likes the price level of the market but believes that the basis will improve or weaken. Specifically, an Open Basis Contract allows a buyer to:

• Lock in a futures price.
• Establish a contract price versus the buyer’s or seller’s published basis at anytime up to a preset pricing deadline.
• Lock in a board price on a non-hedgeable quantity of grain.

A Deferred Payment Contract can be used with any priced contract. With this contract the seller can request that his payment of grain be made at a later date.

At available locations, MFA grain merchandisers may be able to offer customers farm-to-terminal contracts. This type of contract allows growers to sell their grain through MFA but deliver it directly to the buyer, such as a feed mill, ethanol plant, exporter or processing facility. Growers can haul the grain themselves if they have the equipment, or MFA can arrange to have it picked up from the farm.