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Contract Types

Forward (Cash) Contract

Forward contracting allows the seller to secure a cash price and delivery period in advance.  Forward contracts are the most common type of contracts.

Advantages:

-Contracts can be made in any size
-You secure a cash price that cannot decline even if the market does

Disadvantages:

-Cash prices could go higher

Example:

On March 23rd, the July wheat futures price is 6.50 on the CBOT.  Your local elevator has a current basis of –45¢.  You decide to forward contract 2800 bushels at this price.

March 23rd

July wheat futures                  $6.50      

July basis                               $-.45      

Forward contract price            $6.05

You finish delivering your wheat on August 9th.  There is a record wheat crop, and as a result the     current cash price of wheat is down to $4.85.  You fill your 2800 bushel contract and receive $6.05.


Accumulator Contracts

Accumulator contracts allow the opportunity to price grain, above the Chicago board of trade price.  

These contracts allow growers to set a possible ceiling price and a guaranteed floor price, for a cost of $.02 per bushel.

For example if July wheat was trading at $6.62.  An accumulator contract would lock a floor in at $6.62 and give growers the opportunity to price bushels at $6.94 futures price  (basis would still need to be set).  

There is also a feature in this contract that, if triggered, would sell an equal amount of July wheat which would be priced at $6.94 futures. 

These contracts can be written for old or new crop, corn, soybeans or wheat.  You can do as small as 1000 bushels (Possible double to 2000). 


Hedge-To-Arrive

HTA Contracts provide the opportunity to lock in an attractive futures price, and take advantage of  future basis improvements.   Basis can be set anytime prior to the delivery period, and must be set 15 days prior to the delivery month.

Advantages:

-Allows basis to possibly strengthen over time.
-No margin calls.

Disadvantages:

-Futures prices could go higher.
-Basis could weaken, causing a lower cash price.
-Contracts require a minimum of 1000 bushels.

Example:

On August 22nd, the November soybean futures price is 10.75 on the CBOT.  Your local elevator has a current basis of –75¢. You decide to lock in futures at this price, which must be done during trading hours at the CBOT.

August 22nd

November futures                  $10.75    

November basis                      $-.75    

Forward contract price            $10.00

 As time passes, basis levels improve.  On September 7th, your elevator has a basis of –55¢ (a 20 cent   improvement from August.  You lock in this basis, securing a final cash price of $10.20. 


September 7th

November futures $10.75

November basis    $-.55

Forward contract price $10.20

Basis Contract

Basis contracts allow growers to contract by locking in the basis portion of the price.  This allows for    improvement in the futures price. 

Advantages:

-Can take advantage of an upward movement in futures prices.
-Receive a cash advance after delivery to the Co-op (up to 80% of net value).
-No cost to growers.
-Stops storage costs on grain already delivered.
-May be rolled forward, if desired by the seller and agreed to by the buyer, one time only, spread values must be taken into consideration.

Disadvantages:

-Futures prices could go lower 
-Contracts require a minimum of 1000 bushels.

Example:

On December 3rd, the March corn futures price is $4.25 on the CBOT.  Your local elevator has a current basis of –35¢, resulting in a cash price of $3.90  You feel basis is acceptable, but you believe futures price will increase.  You enter a basis contract for 5000 bushels of corn at a basis of –35¢ under the December futures.

December 3rd

March futures                    $4.25      

March basis                       $-.35      

Cash price                         $3.90

On February 10th, the March corn futures price is $4.50, a futures price must be locked in during trading hours at the CBOT.

February 10th

March futures                    $4.50

March basis                       $-.35

Cash price                         $4.15

*And is this scenario there would be no storage from December 3rd through February 10th.

For additional information on specialty contracts contact the marketing department.
Disclaimer: The data and comments herein are provided for information purposes only and are not intended to be used for specific trading strategies.  Although all information is believed to be reliable, we cannot guarantee its accuracy or completeness.  Commodity trading involves risks, and you should fully understand those risks before trading.