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Forward Contracting Grains

Forward Contracting Grains. John Hobert. Farm Business Management Program Riverland Community College. What were the Marketing Tools Discussed Last Month? . The Cash Market The Forward Contract Hedging Delayed Pricing Government Programs: CCC Options Animal Feeding.

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Forward Contracting Grains

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  1. Forward Contracting Grains John Hobert Farm Business Management Program Riverland Community College

  2. What were the Marketing Tools Discussed Last Month? • The Cash Market • The Forward Contract • Hedging • Delayed Pricing • Government Programs: CCC • Options • Animal Feeding

  3. More Marketing Tools. • Sell Cash-Buy Futures • Alcohol Plant Agreements • Speculating............No! No! No! • Buy or Sell Orders

  4. Problems in Farm Marketing • Specialization in agriculture leaves the farmer subject to wide shifts in income and pricing of commodities. • The farmer generally needs to cover his costs over an extended period of years if he wishes to be successful. • The supply of food is difficult to keep in balance with the demand of food.

  5. More Problems in Farm Marketing • Farmers lack market power. A few individual farmer have no affect on the big picture throughout the country or world. • Other occupations are more insulated from markets than farming. • It is difficult for many producers to make a decision on a marketing strategy which is best for them.

  6. What should your marketing goals be at the least? • Receive the highest average price during the marketing season as possible. • Achieve the highest maximum profit from your crop as possible. • Control your marketing risk through some good decision making. • Select a marketing technique which is convenient to you as a farmer.

  7. Will marketing goals be the same for all farmers? • A young farmer with considerable capital debt probably needs to take less risk in his marketing plan. • More established farmers may be in a capital position to assume more risk in their marketing plan. • Some farmers may option to select simple marketing methods for convenience.

  8. Advantages of the Forward Contract in General • You lock in a price for future delivery at a certain location. • It is the most widely used and understood of forward pricing alternatives. • It is simple and legally binding. • It usually can be made in any amounts. • There are no margin calls.

  9. More Advantages of the Forward Contract in General • It eliminates second guessing. • It can be tied to a buy/sell order. • You control the amount of risk you wish to assume. • You can target your selling price at your cost of production through some good record-keeping.

  10. Disadvantages of the Forward Contract in General • You have yourself locked in and have thrown away the key. • You have no advantage from a narrow basis position. • You must know your production costs to be successful with this marketing tool. • You will most likely not receive the highest prices for the marketing season.

  11. Where can I Execute a Forward Contract? • Country Elevators. • i.e. Ag Partners, Cannon Valley Coop • Sub-terminal Elevators. • i.e. Continental Grain, GTA • Terminal Elevators. • i.e. Cargill Inc. • Transformation Markets. • Feed manufacturers, processors, exporters.

  12. What Contract Provisions should I be concerned about? • The parties to the contract. • The date of the contract. • The commodity to be exchanged. • The quantity involved in the contract. • How the commodity is to be packaged. • Additional specifications. i.e. grades

  13. More Contract Provisions • The price per unit. • The terms of payment. • The point and method of delivery. • The time for final delivery. • Obligations for accepting and pricing grain downgraded by weather of delays in harvesting, etc.

  14. More Contract Provisions • Penalties for default should also be mutually agreed upon and specified in the contract to prevent any misunderstanding. • Contracts are legal and binding agreements and should always be spelled out in writing.

  15. Forward Contracting Strategy • Cover your input costs by forward contracting a portion of the crop, perhaps 1/3 at or prior to planting. • When the crop is well along, consider contracting another 1/3 of the crop. • Plan to store the remaining 1/3 of the crop for after harvest delivery with sell orders.

  16. How do I determine my costs of production? • Work within a Farm Management Program to accurately determine my costs of production.(FINPACK) • Develop crop production spreadsheets to determine my costs of production. • Direct your attention at accurate farm records which will improve your overall marketing ability.

  17. A Brief Look at Determining your Crop Production Costs. • Utilizing FINPACK production cost data. • Utililzing Crop Marketing Plan spreadsheet data. • Utilizing Historical production cost data.

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