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Purchase Contract

Purpose

A puchase contract is to establish a fair market price when the producer believes the price is satisfactory.

When does a producer feel when a purchase contract is appropriate to use?

There are several factors when a producer might want to engage in a purchase contract. The producer may feel the need to move the grain off the farm or from commercial storage. The producer may feel like the market is at good price level, and/or they may believe that the market will trend lower. Therefore, they establish a price for either a nearby or deferred delivery. However, with this method of contracting grain, there is no potential for price improvement if the market would raise. 

Purchase Contract Guidelines

When taking on a cash contract, the producer will have to establish a delivery period and destination. There are no service charges, and only storage charges would occur if the producer is selling out of storage on a deferred delivery. Between the buyer and seller, other terms may be included if both parties are in agreeance. 

Basis Contract

Purpose

To utilize a basis contract, the producer wants to lock in a beneficial basis level whenever the cash price is not satisfactory.

When does a producer utilize a basis contract?

A producer might use a basis contract if cash prices are low but believes that the basis is satisfactory. It allows the producer to delivery the grain and then gives the opportunity for possible price improvement. Also, if the producer needs income, a basis contract would allow them to receive partial payment, in the form of an advance, once the grain is delivered.

Basis Contract Guidelines

The producer will have to establish a delivery period and destination, and the discounts are determined on the delivery destination of the grain. The basis contract must be priced or rolled by the last day of the month prior to the delivery period. There are no storage or service charges. The seller can request an advance after the grain is delivered that will be deducted from settlement at time of payment. Between the buyer and seller, other terms may be included if both parties are in agreeance. 

Hedge-To-Arrive (HTA) Contract

Purpose

A HTA contract is used to lock in a futures price without establishing a basis. 

When would a producer use an HTA contract?

A producer would use an HTA contract whenever they believe the futures market has peaked and/or believe that the futures will soon drop in price, and they believe that the basis is very poor. The producer would then lock in a futures price and option month during regular trading hours and before delivery.

HTA Guidelines

The price on the HTA contract must be established during regular trading hours of the Chicago Mercantile Exchange. 

 

Price Later (DP) Contract

Purpose

A Price Later (DP) contract allows the producer to deliver the grain without establishing a price. 

When would a producer decide to apply grain to a Price Later (DP) Contract?

Applying grain to a Price Later (DP) contract would allow the producer the move the grain whenever he or she feels that the cash price or basis is poor. This would be a beneficial decision to use whenever the service charges, if any, are less than storage costs. With this opportunity, it allows the producer to utilize time for possible price improvement. However, Price Later programs may not always be available to use, and unpriced grain could ultimately be a losing transaction in a downward trending market.

Price Later (DP) Contract Guidelines

The producer will have to establish a delivery period and destination, and the discounts are determined on the destination of where the grain is delivered. Service charges must be agreed upon and will be collected whenever the grain is settled uponBetween the buyer and seller, other terms may be included if both parties are in agreeance.