Grain Contracts

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Minimum Price Contracts
Basis Contracts
Hedge-To-Arrive (HTA) Contracts
No Price Established (NPE) Contracts
Options Trading
Grain Bank


Minimum Price Contracts

These contracts establish a floor price for grain while offering the flexibility to participate in potential market increases.

How does it work?
A producer agrees to deliver a specific quantity and quality of grain for a determined delivery period. The contract sets a minimum cash price by locking in a current market price less the cost of a designated call option. Call options give the buyer the right, but not the obligation to own futures at a given strike price level. Call options gain value as the market goes higher. This allows the producer to gain value on the contract as the market works higher above the designated strike price.

Example:
Assume the cash price for corn for March delivery is $2.20/bushel. The price is better than it has been for a while, and a producer wants to lock that price in on part of his crop, but overall he feels prices have the potential to go higher during the hot months during the summer. If a July 2.50 call costs 14 cents on this particular day (includes a 2-cent service charge), then a Minimum Price Contract would be written for $2.06 (2.20-.14). This would be the guaranteed minimum price of the contract. If July futures at the Chicago Board of Trade exceed the 2.50 strike price anytime prior to expiration, then the contract could be re-priced at the difference. If July futures trade at 2.90, then the contract would show a 40-cent gain. The final price would be determined as:

Original cash price $2.20
Option Premium - .14
Minimum Price $2.06
Futures Gain + .40
Final Price $2.46

If July futures never trade above 2.50 or go lower at expiration, then the minimum price of $2.06 would be the final price.

Minimum Price Contract Advantages

• The contract establishes a floor price, while retaining the ability to participate in market rallies.
• The producer can determine the month and strike price of the call option to customize option costs.
• Option costs are deducted from the price, and not paid out of pocket up front.
• The minimum price can be collected at time of delivery or deferred.

Minimum Price Contract Risks

• Prices may not improve before expiration, resulting in no return for premiums paid.
• Pricing occurs one time before expiration.
• Premiums for specific strike prices can be expensive during volatile markets.
• Contracts must be done in 5000-bushel increments.

Basis Contracts

Basis contracts are contracts that allow a producer to lock in the basis and price the grain at a later date.

How does it work?
A producer agrees to deliver a specific quantity and quality of grain for a determined delivery period. The basis is determined by taking the difference between the local cash price for grain and the respective Chicago Board of Trade (CBOT) futures price. This spread is called the basis. This basis value becomes locked in on the contract. The final price of the contract is determined at a future date by taking the respective CBOT futures price less the locked in basis.

Example:
Assume the cash price for corn for March delivery is $2.20/bushel. At the same time July futures on the Chicago Board of Trade closed at $2.50. The basis is determined to be 30 cents under the July futures (2.20-2.50). Historically it is determined that this is a good basis value, but the producer does not want to lock in the cash price of $2.20 at this time because potential summer market rallies could take the market higher. A basis contract would lock in the 30 cents under the July futures, and the final price would always be 30 cents under the CBOT July futures price up, until expiration. If July futures rallied to $2.90 on June 15th, the contract could be priced out at $2.60 (2.90-0.30).

Basis Contract Advantages

• The contract is done at a time when basis levels are attractive and retain the ability to participate in market rallies.
• A cash advance up to 70% of the contract value can be paid out anytime prior to final pricing.
• There are no service fees on basis contracts, unless a contract is written under one month and rolled to another. There is a 2-cent service fee for rolling a contract. Contracts must be priced or rolled prior to first delivery notice day for each futures month.

Basis Contract Risks

• There is still down side market risk. There is no price floor established if markets go lower.
• If an advance is collected, the contract will be automatically priced out if the market goes lower to the amount of the advance.
• Basis risk is still present if basis values get stronger.

Hedge-To-Arrive (HTA) Contracts

These contracts allow a seller to lock in a futures price on the Chicago Board of Trade (CBOT) and price the grain at a later date if basis levels improve.

How does it work?
A producer agrees to deliver a certain quantity and quality of grain during a set time period. The producer chooses the futures price level, but the basis remains open until it is set prior to delivery.

Example:
On March 1, December corn futures at the CBOT are trading at $2.50 and the current local basis for October delivery is 50 cents under the December futures; making the cash price $2.00/bushel (2.50-0.50). This contract allows the producer to lock in the $2.50 futures level and price the grain when/if basis improves. If by October the December futures have dropped to $2.25, but the basis improves to 30 cents under the December futures the cash price would be $1.95 (2.25-0.30). Under the contract, the final price would be determined as:

December Futures Locked in on contract $2.50
Less the new basis - .30
Final Cash Price $2.20

There is a 10-cent service fee on these contracts, which is deducted at final settlement.
This would be a 23-cent premium over the actual cash price in October after the service fee.

HTA Contract Advantages

• Ability to lock in the futures carry, leaving the basis open to gain on future basis appreciation.
• The final basis can be established any time prior to delivery.
• Service fees are deducted from the cash settlement and are not paid up front.

HTA Contract Risks

• The contract provides no opportunity to take advantage of higher futures prices.
• Basis must be locked in before grain is delivered.
• The contract offers no protection in the event that basis levels drop or remain steady.
• Service fee increases on contracts less than 5,000 bushels.

No Price Established (NPE) Contracts

The NPE contract is a contract where by the grain is actually sold and moved off the farm, but the price has not been determined. The title of the grain passes from the seller to the buyer, but the final price will be determined at a later date.

How does it work?
Assume a producer has a bin of corn on the farm that he would like to empty before beginning spring fieldwork, but the cash price is not attractive at the time. The NPE contract allows the producer to move the grain, but not set the final price.

NPE Contract Advantages

• Allows grain to be moved at times when it is more convenient for the seller, even though prices may be poor.
• Condition risks are passed on to the buyer.
• NPE charges can be cheaper than storage costs and sometimes are free depending on market conditions.

NPE Contract Risks

• The contract provides no price protection in the event markets go lower.
• NPE charges can be expensive during markets showing good carrying charges.
• The title of the grain passes to the buyer upon delivery.

Options Trading

River Valley Cooperative is a licensed brokerage office under the supervision of FC Stone L.L.C. in West Des Moines, Iowa. Producer accounts can be set-up for trading options on the Chicago Board of Trade. For account application information contact River Valley Cooperative's FCC Futures Office at 563-285-6532 or 563-285-7820 Ext. 320.


Grain Bank

There is a 6 cent per bushel storage charge for the first 90 days for all grain put on grain bank. After 90 days a monthly charge of 3 cents/month (.1 cents/day) will apply on remaining bushels. Grain must be used within 12 months of issuance. Grain bank corn sold to the warehouseman will be charged regular storage rates from date of delivery. Whole grain that is taken from grain bank in an unprocessed form and not mixed through the feed mill will be charged a processing fee of .30/cwt. plus .10/bushel delivery if applicable. Posted grind/mix/delivery charges will apply if cracked corn is taken from grain bank.

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