Grain Marketing: Forward Price Contracts
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Collapse ▲Concerned about falling grain prices?
There are a few ways to lock-in a future price for your crop before it has been harvested. A forward price contract with a nearby elevator is one of the more straightforward ways to do this.
What is a Forward Price Contract?
These are contracts between a buyer and a seller where the product will be delivered at a later time. Both the buyer and the seller agree on:
- a product
- a price
- a quantity
- delivery
Contract details may also include specifics about the quality, premiums or penalties, and who is in charge of transportation.
Pros and Cons to the Farmer
The advantage of a forward price contract to a grower is that they have a sale price locked-in for part of their crop. Another thing to remember is that once the price is locked in it also cannot increase, even if the market price increases later. The farmer has transferred the risk of falling grain prices to the buyer. For this reason there is often a small fee associated with forward contracts.
Pros and Cons to the Grain Buyer
Locking in a price to buy grain means that now the buyer is the one vulnerable to price drops. The advantage of a forward price contract for the buyer is that they have locked-in a price to purchase grain that they know they will need in the future to meet the demands of their customers.
What Kind of Risk does a Forward Price Contract Reduce?
Forward price contracts reduce price risk. Production risk is still a concern to the farmer because the yield is not known until harvest. It is recommended that growers forward contract a maximum of 60% of their anticipated crop, because if yield is lower than expected they should still have enough grain to meet the contract requirements. In some cases where a farmer did not have enough grain to sell to the buyer as promised, they can buy the contract back from the buyer.
What about Futures Contracts?
Futures contracts are a type of standardized forward contract that are publicly traded on an exchange. They are typically accessed through the Chicago Mercantile Exchange, or “CME”. These contracts require a minimum of 5000 bushels and are usually handled through a broker.
Forward price contracts are the simplest way to hedge potential losses from the risk of falling grain prices. You can contact your local elevator to learn more about which types of contracts they offer.
This project is funded by the NC Small Grain Growers Association. For more information on NC wheat visit the North Carolina Small Grain Growers Association.