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Grain Contracts 11/05/13 12:57:08 PM
THIS IS A BEGINNING STUDY OF GRAIN CONTRACTS....
IN THE TABLE BELOW IS A LIST OF GRAIN CONTRACTS THAT WE CAN USE FOR YOUR BENEFIT.
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CUSTOMER BENEFITS |
FORWARD PRICE CONTRACT |
BASIS*
CONTRACT |
NO PRICE ESTABLISHED CONTRACT |
MINIMUM PRICE CONTRACT |
OPEN BASIS CONTRACT |
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PROTECTED FROM PRICE DECLINE |
YES |
NO |
NO |
YES |
YES |
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GAIN WITH FUTURES PRICE INCREASE |
NO |
YES |
YES |
YES |
NO |
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PRICE CHANGE WITH ELEVATOR PRICE |
NO |
NO |
YES |
NO |
NO |
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MONEY AVAILABLE AFTER DELIVERY |
YES |
YES |
( 1 ) |
YES |
YES |
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PRICE CHANGE WITH BASIS* CHANGE |
NO |
NO |
YES |
NO |
YES |
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ADDITIONAL CHARGES OR COSTS |
NO |
( 2 ) |
USUALLY |
( 3 ) |
NO |
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USED BEFORE GRAIN DELIVERY |
YES |
YES |
YES |
YES |
YES |
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USED AFTER GRAIN DELIVERY |
NO |
YES |
YES |
YES |
NO |
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USED AS STORAGE ALTERNATIVE |
NO |
YES |
YES |
YES |
NO |
*NOTE: BASIS IS THE DIFFERENCE BETWEEN THE FUTURES PRICE AND THE ELEVATOR'S PAYING PRICE.
(1) FUNDS ARE USUALLY NOT ADVANCED TO THE CUSTOMER UNTIL THE GRAIN HAS BEEN DELIVERED AND PRICED. IN THOSE CASES WHERE A PARTIAL ADVANCE IS GIVEN, THE CUSTOMER IS NORMALLY REQUIRED TO PAY AN ADDITIONAL FEE.
(2) UNDER NORMAL CONDITIONS, THERE IS NO ADDED CHARGE. IN THOSE CASES WHERE THE BASIS IS CHANGED TO ANOTHER FUTURES MONTH, A MINIMAL TRANSACTION FEE IS CHARGED.
(3) THERE IS AN INITIAL COST FOR OBTAINING A FUTURES OPTION. THAT COST MAY BE TOTALLY OR PARTIALLY RECOVERED DEPENDING ON SUBSEQUENT MARKET PRICE CHANGES.
MFA ALSO OFFERS DEFERRED PAYMENT AND STORAGE PROGRAMS
THE FIRST CONTRACT WE WILL DISCUSS IS A FORWARD CONTRACT (FIXED PRICE). AS YOU CAN TELL FROM THE ABOVE CHART, IT LOCKS IN THE ELEVATORS CASH BID FOR A SET AMOUNT OF BUSHELS AND A SET DELIVERY DATE. IF THE MARKET FALLS OR GOES UP, YOU AND THE ELEVATOR ARE LOCKED IN AT THE AGREED PRICE..
THIS CONTRACT CAN BE TIED TO OTHER CONTRACTS, FOR EXAMPLE.. A CALL CAN BE PURCHASED AT A COST DEDUCTED FROM YOUR FIXED PRICED CONTACT AND NOW YOU HAVE A MINIMUM PRICE CONTRACT.
BASIS CONTRACT IS THE NEXT CONTRACT.
THE FIRST THING TO KNOW ABOUT A BASIS CONTRACT IS, WHAT IS THE MEANING OF A BASIS? THE BASIS IS NOTHING BUT THE DIFFERENCE BETWEEN THE LOCAL ELEVATOR CASH PRICE AND THE APPROPRIATE FUTURES CONTRACT PRICE.
FOR EXAMPLE
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FUTURES PRICE
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$4.56
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CHICAGO MARCH FUTURES
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BASIS
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-.31
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CENTS UNDER MARCH BEAN FUTURES
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MFA CASH PRICE
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$4.25
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1) IN THIS EXAMPLE, A MFA CUSTOMER CAN SELL A BASIS CONTRACT TIED TO 31 CENTS BELOW THE CHICAGO MARCH FUTURES AND RECEIVE A PARTIAL ADVANCE AFTER THE GRAIN HAS BEEN DELIVERED. ASSUMING NO QUALITY PROBLEMS, MFA MAY ADVANCE THE CUSTOMER 50 TO 70% OF THE VALUE OR IN THIS CASE $2.55 TO $2.98 PER BUSHEL. THE FINAL PRICE AND BALANCE PAYMENT TO THE CUSTOMER WILL DEPEND UPON THE ACTUAL CHANGE IN THE FUTURES PRICE.
2) THE THING TO REMEMBER IS THAT THERE IS NO SET PRICE, IF THE FUTURE RISES YOU WILL GAIN IN VALUE AND IF THE FUTURE GOES LOWER YOU WILL LOSE VALUE. IF THE VALUE GOES BELOW WHAT YOU HAVE BEEN ADVANCED YOU ARE REQUIRED TO REIMBURSE THE ELEVATOR FOR THE AMOUNT OF THE DECLINE IN VALUE. IT IS ALWAYS BEST TO TALK TO YOUR LOCAL MANAGER FOR ALL DETAILS ON THIS TYPE OF CONTRACT.
3) THE BASIS WILL CHANGE AS MARKET CONDITIONS CHANGE. THE CHANGE IN BASIS CAN BE EITHER HIGHER (POSITIVE) OR LOWER (NEGATIVE). OVER AN EXTENDED PERIOD OF TIME , THE BASIS WILL USUALLY ( BUT NOT ALWAYS ) TEND TO BE POSITIVE.
4) WHEN THE BASIS CHANGE OVER TIME IS POSITIVE THE SELLER MAY GET THE FALSE ILLUSION THAT HE HAS LOST OUT ON A PRICE GAIN BECAUSE LOCAL PAYING BASIS HAS IMPROVED AFTER THE BASIS CONTRACT HAS BEEN WRITTEN. HOWEVER, THE ADVANTAGES OF RECEIVING NO INTEREST ADVANCES, NO STORAGE COSTS, AND STOPPAGE OF GRAIN SHRINKAGE AND QUALITY DETERIORATION MAY OFTEN PUT THE USER OF A MFA BASIS CONTRACT SIGNIFICANTLY AHEAD OF SOMEONE WHO CHOSES TO STORE AND WAIT. AN EXPLANATION OF ADVANTAGES AND DISADVANTAGES ASSOCIATED WITH A BASIS CONTRACT ARE LISTED IN THE ABOVE TABLE.
NO PRICE ESTABLISHED CONTRACT;
A NO PRICE ESTABLISHED CONTRACT WORKS WELL FOR THE INDIVIDUAL WHO WISHES TO DELIVER HIS GRAIN AND RETAIN THE ABILITY TO PARTICIPATE IN MARKET PRICE CHANGES WHEN THE CHARGES ASSOCIATED WITH THE CONTRACT ARE AT OR BELOW THE COST OF STORAGE..
EXAMPLE:
THE MFA ELEVATOR IS BIDDING $5.56 FOR SOYBEANS IN MARCH BUT A PRODUCER DOES NOT WISH TO SELL UNTIL AFTER PLANTING SEASON AND HE IS ASSURED THAT HIS SPRING-PLANTED CROP IS DOING WELL..
THE MFA ELEVATOR HAS A STORAGE RATE EQUAL TO 4 CENTS PER BUSHEL PER MONTH. AFTER ANALYZING MARKET FACTORS, THE MFA GRAIN SPECIALIST OFFERED A NO PRICE ESTABLISHED CONTRACT AS A GRAIN MARKETING ALTERNATIVE. THE MFA SPECIALIST ESTABLISHED A NO PRICE ESTABLISHED CONTRACT WITH THE PRODUCER AT A 2.5 CENT PER BUSHEL PER MONTH CHARGE AND GAVE THE PRODUCER UNTIL OCTOBER 31 OF THE CURRENT YEAR TO PRICE THE CONTRACT.
THE FINAL NET PRICE THE PRODUCER WILL RECEIVE WILL DEPEND ON THE ACTUAL CHANGE IN THE MFA ELEVATOR'S PAYING PRICE AND THE TOTAL AMOUNT OF THE CHARGES THAT WILL BE ASSESSED. IF THE PRODUCER WAITS MONTHS TO PRICE THEM.
HAD THE SELLER WANTED FUNDS, MFA WOULD HAVE GIVEN HIM A PARTIAL ADVANCE AT A MINIMAL ADDITIONAL CHARGE. ADVANCES ARE AVAILABLE AFTER THE GRAIN IS DELIVERED.
CONTRACT CHARGES ARE DETERMINED BY MARKET CONDITIONS AND WILL CHANGE AS MARKET CONDITIONS CHANGE AND MAY BE OFFERED IN MANY DIFFERENT FORMATS.
CONTRACT CHARGES ARE A KEY CONSIDERATION IN DETERMINING IF THE MFA NO PRICE ESTABLISHED CONTRACT CURRENTLY BEING OFFERED IS THE BEST PROGRAM FOR YOU. NO PRICE ESTABLISHED CONTRACTS ARE NOT ALWAYS THE BEST ALTERNATIVE AVAILABLE BUT THEY SHOULD ALWAYS BE CONSIDERED.
The Minimum Price Contract works well for the individual who wishes to protect himself from a price decline, receive payment upon delivery and retain the ability to participate in market price increases for a set period in the future. However, there is a one - time initial contract charge which may or may not be recovered by the seller depending on subsequent market price changes.
Example: The MFA elevator is bidding $6.87 for soybeans delivered in during October. A producer needs money to meet some current expenses but believes that the price will contine to increase through spring. However , he does not want to risk a major soybean price decline.
The MFA elevator is able to write a Minimun Price Contract that will allow the producer to receive $6.58 for his soybeans after they are delivered. The 29 - cent difference between MFA's delivered bid price and the minimum price is the initial cost of the contract.
The producer retains the right to participate in any subsequent price increase in Chicago July soybeans futures above $7.00 until mid - June of the following summer. The current trading price of Chicago July soybeans is $6.97, or 3 cents below the base price for repricing the Minimum price contract.
The producer accepts the terms and is paid $6.58 bushel knowing that the money is his to keep no matter what subsequent prices may do. His risk of loss is now limited to the contract's initial 29-cent cost. The total payment the producer will receive will depend on market prices at the time he decides to exercise his final pricing privilege.
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Higher priced market example |
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Chicago July Soybeans |
$ 8.44 |
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Base Futures Price |
$ 7.00 |
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Gain in Price |
$ 1.44 |
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Producer's Balance Payment |
$ 1.44 |
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Lower prices market example |
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Chicago July Soybeans |
$ 5.83 |
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Base Futures Price |
$ 7.00 |
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Loss in Price |
$ 1.17 |
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Producer's Balance Payment |
$0.00 |
Note: The above is the minimum additional balance payments to the producer. In some cases, it may be possible to give a slightly higher balance payment than is indicated by the difference in the base futures price and the actural futures prices at the time of pricing. This will be determined by market conditions at the time of final pricing.
The MFA MINIMUM PRICE CONTRACT HAS THE FLEXIBILITY TO ALLOW THE PRODUCER TO ROLL - UP TO A HIGHER MINIMUM PRICE IF THE MARKET PRICE INCREASES. MFA OFFERS IT CUSTOMERS MINIMUM PRICE CONTRACTS IN 5,000 BUSHEL INCREMENTS .
The above is given only as an informative example. Your MFA Grain Marketing Specialist can help you determine if a Minimum Price Contract is the best grain marketing approach for you.
The MFA Open Basis Contract is a perfect tool for an individual who wishes to lock in the Futures Board price on grain he will deliver during a later period and believes that the MFA Basis will improve prior to the time of delivery. It provides a classic hedging alternative for the producer who is familiar with historical basis patterns.
Example: In July the MFA elevator has a forward cash price bid of $7.57 for October delivered soybeans. With Chicago November Soybeans Futures trading at $8.02, MFA has a delivered basis of 45 cents under the Chicago November Soybeans Futures for October delivery.
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November Futures Price |
$8.02 |
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MFA October Deliver Bid |
$7.57 |
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MFA October Basis |
.45 under November futures |
The producer likes the board price and believes he will have a good soybean yield . However, after reviewing his records, he notices that the MFA delvered basis on October soybeans was below " 45 cents under November Soybean Futures" only once during the last six years. The second lowest basis level was 41 cents under November Soybean Futures and in four of the six years, the MFA basis during October was 35 cents under the Futures Board or better.
The producer believes the odds greatly favor reaching a better basis level by October and entered into an Open Basis Contract to lock in the $8.02 Futures Price. He retains the right to lock in MFA's October delivery basis at anytime up to the time he delivers his first load of soybeans in October.
If the Futures Board price declines, the seller is fully protected by his $8.02 locked in futures price. If the futures price increases, he does not participate in the increase because he has already contracted to accept an $8.02 futures price. The seller's only concern is the subsequent change in MFA's Basis.
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Higher Basis Example |
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Contracted Futures Price |
$8.02 |
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MFA's Octocber Basis |
-.32 |
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Producer's Final Price |
$7.70 |
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Gain on Contract |
+ .13 |
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Lower Basis Example |
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Contracted Futures Price |
$8.02 |
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MFA's October Basis |
-.52 |
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Producer's Final Price |
$7.50 |
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Loss on Contract |
-.07 |
The above is given only as an informative example. Your MFA Grain Marketing Specialist can help you determine if an Open Basis Contract is the best grain marketing approach for you.
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