ADM ADVANTAGEsm EXPERT

Grain marketing is just one part of the important work you do, but it takes constant attention. This grain contract that adds diversity to your marketing plan, while minimizing stress and worry by executing for you.

This is achieved by allowing the futures price portion of the contract to be marketed by indenpendent market Professionals of Crow Trading (Richard Crow), Farm Direction (Kevin Van Trump) and ADM Marketing Partners Advisory. Choice of market professional made at the time of contract sign up (can even be multiple professionals). You have the responsibility of pricing the basis portion of the contract. Basis can be set at any time during the period before delivery.  Sign-up period for this contract is typically November and December. 1000 bu minimum.  

 

AVERAGE SEASONAL PRICE Contract

The Average Seasonal Price Contract (ASP) is a cash grain contract that allows producers to price a specific amount of bushels over a specific amount of time.  The bushels and the time frame are set at time of contract. 
Bushels on the ASP Contract are priced over a pre-determined time frame and are priced in equal amounts on a weekly basis over the time frame.  Pricing will be done each Thursday at 2pm at the close of the CBOT market for that day. HTA contracts will use the closing futures price and cash contracts will use the closing cash price for the day at the location specified. 
There is a one time opportunity to price out any unpriced bushels on any date during the day market session at the cash or futures price at that time. 

Advantages: ASP contract provides discipline to marketing your crop through pricing an equal quantity of contracted grain over a specific period. Since the pricing mechanism is automatic, this also takes the emotion out of the pricing decision and you can be assured that your contracted bushels will get priced. Also, sharp rallies can be can taken advantage of by utilizing a one time price out option on all remaining unpriced bushels on the contract by notifiying a Fremar originator on any date during the market day session. No HTA fees, No Service Fees, 1000 bushel minimum to sign-up.

Disadvantages: Historical price patterns are not a guarantee of future price movement. The price is averaged or indexed not delayed or accelerated based upon market action during the pricing period.

Example 1: Producer contracts 5000 bushels of corn for harvest delivery to Fremar.  The pricing period is Jan 5 - Sept 14.  There are 37 pricing dates (Thursdays) during this period.  5000 bushels divided by 37 pricing dates would price 135 bushels per Thursday.  At the end of this pricing period, the average cash or futures price will be determined.

Example 2:  If producer is halfway through pricing period and market rallies to level where they would like to price the unpriced portion of the bushels, they can price it at current market on that date.  The unpriced bushels will be averaged with the bushels that have been priced to date and will then generate one contract with the average price over the pre-determined amount of bushels.  These bushels will be completely priced at this time. 
 

BASIS FIXED Contract

The basis portion of this contract is determined or “fixed” at the time the contract is written. Pricing of the futures portion of the contact can be done at a later date. Payment on this contract is made upon final pricing unless the pricing precedes the shipment period.

Advantages

  • Allows the seller the ability to benefit if the futures market rallies before the pricing date on the contract.
  • Allows the seller of grain the ability to lock in favorable basis levels if the seller feels the basis market will decline before pricing the futures portion of the contract.
  • Allows the seller to deliver grain immediately while still waiting to price the futures portion of the contract at a later date.
  • Eliminates storage expense inherent in inventorying grain while waiting for a price rally.
  • Eliminates the risk of quality deterioration that is inherent with storing grain.

Disadvantages

  • Exposes the seller of grain to any potential decline in the futures market.
  • Does not allow the seller the ability to take advantage of carry that may be available in the market.
  • Payment is not received until grain is priced.

Example:  On December 1st, the posted cash bid for February delivery corn is $3.60 and the March futures level is $4.00 The basis level is 40 cents under the March futures. You like the basis level, but think that the futures market has a potential to rally. You think because of this possibility and seasonal corn movement after the first of the year will likely cause the basis to widen before you plan to deliver. You enter a Basis Fixed (Unpriced) contract with Fremar LLC and lock in the 40 cents under the March futures.

A friendly January crop report has caused March futures to rally to $4.25. Seasonal corn movement has also been brisk. On January 25th, Fremar’s basis level has widened to -50 cents under the March futures for February delivery. You have two options at this point:

1.You can lock in (Price) any amount of bushels on the basis contract at $4.25 March futures.  By pricing the contract, you receive $3.85 cash price for any bushels that are on the contract. ($4.25 -.40 = $3.85).  
2.You can elect not to price the bushels prior to delivery and to deliver in February. Bushels would  then have to be priced by the end of February.
 
 
DELAYED PRICE Contract

The seller delivers grain to the receiver and is issued a delayed pricing contract. The seller can price the grain in the future at his/her discretion up until the final delayed pricing date. Normally the issuer of the contract will assess a monthly service charge that is comparable to monthly storage rates. The title of the grain passes to the receiver upon delivery of the bushels.

Advantages
  • Allows the seller of grain to deliver at a time that fits the seller’s desired shipment date.
  • Allows the seller to price the grain at a later date and benefit if the market rallies.
  • This alternative may eliminate the sellers risk of quality deterioration of stored grain.
Disadvantages
  • Does not provide payment until the contract is priced.
  • Provides no protection to the seller of grain in the event the market declines prior to pricing.
  • The seller generally will pay a monthly service charge for this contract.
Example:  On October 1st, Fremar quotes cash corn at $3.00 for corn. You believe prices will improve over the next few months and your bins are full, so you haul corn in at harvest and put it on a delayed price contract. The service charge is 5 cents per month and the pricing deadline is September 30th of the following year. On March 1st, cash corn is $3.75. You are satisfied with this price and decide to price your contract. Your net selling price would be $3.50 (3.75 - .25 service charge).
 
 
FLAT PRICE FORWARD Contract

The seller of grain is selling at a predetermined price and time in the future. This alternative is suitable when the grain market provides favorable prices, carry, and the seller feels prices are attractive.

Advantages
  • Allows the seller to lock in a favorable price if the seller feels prices will be declining in the future.
  • Allows the seller the ability to sell grain in a time frame that supports the seller’s desired shipment date.
  • Allows the seller to lock in a price before the cop is planted or harvested.
Disadvantages
  • Does not allow the seller to benefit if prices rally in the future.
  • May expose the seller of grain to quality deterioration if the seller has to store grain until a later delivery date.
  • Payment is not received until all grain is delivered per contract specifications.
 Example: On June 1st, Fremar LLC posts a cash bid of $9.25 for soybeans delivered to Marion in October. The basis is 90 cents under the November futures, which are $10.15. You believe the futures price isn’t likely to improve and the basis level is historically narrow so you sell the beans under a Flat Price Forward Contract. 
 
 
HEDGE-TO-ARRIVE Contract 

The HTA contract is one that offers the seller of grain the ability to lock in the futures market portion on a cash grain contract. The basis portion of the cash grain contract will be locked in at a later date per contract specifications. This alternative is thus suitable for the seller of grain who feels that futures market prices will fall and basis will improve.

Advantages
  • Allows the seller to lock in what he/she perceives to be a favorable futures market price.
  • Provides time during which the seller can price the basis portion of the contract. If the seller of grain feels the basis market will improve, this alternative provides the seller to price the basis portion of the contract at a later date.
  • Allows the seller to lock in favorable futures market carry when available.
  • Allows the seller the flexibility to roll the contract to a desired shipment date within the same crop year (October through September).
Disadvantages
  • Does not allow the seller to benefit if the futures market rally after the futures portion of the contract is priced.
  • Does not lock in the basis portion of the trade. The seller is exposed to a potential basis decline.
  • May expose the seller to quality deterioration if the seller has to store grain until a later delivery date.
Example: On June 1st, the posted cash bid for October delivery corn is $3.75 and the December futures level is $4.40. The basis level is 65 cents under the December futures. You like the futures level, but think the basis is historically wide and will narrow before you plan to deliver. You enter a HTA contract with Fremar LLC and lock in the $4.40 futures.
On October 15th you are getting ready to harvest and Fremar LLC’s basis level is 50 cents under the December futures. You have two options at this point:
  1. You can lock in the 50 cents under the December futures basis.  $4.40 December futures is your original futures price minus the 50 cent basis gives you a cash price of $3.90 for your contract. You deliver the bushels directly to the elevator at harvest.
  2. You can roll your HTA to a later futures month within the same crop year. You would like to deliver grain against this contract next July and you think basis will improve before then. There is a 25 cent carry from the December to the July futures. You decide to roll to the July futures and leave the basis open, so your futures price becomes $4.40 plus the 25 cent carry equals $4.65. On July 1st, Fremar LLC’s basis is 45 cents under the July futures and you decide to lock in basis. Your cash price is $4.20 (4.65-.45) and you deliver corn to the elevator in July.

 

MINIMUM PRICE Contract Using a Call Option

This alternative is a cash grain contract that calls for delivery of grain at a specific time. The contract will set a timeframe which the seller can benefit if the futures market price moves higher than the contracted price. The basic premise of the contract is that it allows the seller of grain the ability to sell grain at a specific minimum price, but also affords the seller to benefit if futures market prices move higher after the sale is made.

Advantages

  • Provides a minimum price to the seller with the opportunity to participate in higher prices if the futures market moves higher before the contract’s expiration date.
  • Allows the seller the ability to capture favorable carries when available without finalizing the price of the grain.
  • Provides immediate payment for the cash grain upon delivery. The payment is limited to minimum price outlined in the contract.

 Disadvantages

  • The minimum price that is guaranteed by the contract is a discount to prices that can be received if one simply sells cash grain.
  • Higher futures prices may not guarantee the seller an equally higher price than the minimum price quoted on the contract.
  • The futures market may never increase enough to recover the premium spent.

Example:  On October 1st, Fremar quotes you a cash price for March delivery at $3.50. You want to sell grain today, but be able to get a higher price if the market rallies. You purchase a March call option and choose the $4.00 strike price that costs a 20 cent premium. This option expires February 22nd and you have up until that deadline to re-price your contract. Your minimum price contract with Fremar LLC is written for $3.30 (3.50-.20). On February 1st, grain prices have rallied to $4.40 March futures. Your $4.00 call option is worth a 45 cent premium today, and you instruct Fremar to re-price your contract by exiting your call option. Your minimum price contract is re-priced at $3.75 ($3.30+.45=3.75) and this is your final cash price. You deliver the grain in March.

 

MINIMUM PRICE Contract using a Put Option
 
This alternative is a cash grain contract that calls for delivery of grain at a specific time. The contract will set a timeframe which the seller can benefit if the futures market price moves lower than the contracted price. The basic premise of the contract is that it allows the seller of grain the ability to sell grain at a specific minimum price, but also affords the seller to benefit if futures market prices move lower after the sale is made.

Advantages

  • Provides a minimum price to the seller with the opportunity to gain on the price if the futures market moves lower before the contract’s expiration date.
  • Allows the seller the ability to capture favorable carries when available without finalizing the price of the grain.
  • Provides immediate payment for the cash grain upon delivery. The payment is limited to minimum price outlined in the contract.

Disadvantages

  • The minimum price that is guaranteed by the contract is a discount to prices that can be received if one simply sells cash grain.
  • Lower futures prices may not guarantee the seller an equally higher price than the minimum price quoted on the contract.
  • The futures market may never decrease enough to recover the premium spent.

Example:  On June 1, Fremar is posting a new crop cash bid of $3.75. You think the market will move lower between now and harvest, and decide enter a minimum price contract by using a put option. You select a December $4.10 put option for 25 cents and it expires November 23rd. Your minimum price contract with Fremar is $3.50 (3.75-.25). On November 1st, December futures have fallen to $3.55 and the premium on your put is now worth 60 cents. You instruct Fremar to re-price your contract, and your final price is $4.10 (3.50+.60). You deliver new crop bushels in November to fill the contract.

 

SPOT SALE 

This spot sale is an alternative in which grain is sold for immediate shipment at current prices. This alternative is suitable if one believes grain prices will continue to decline.

Advantages
* Very simple approach to grain marketing.
* Provides prompt payment for grain.
* Allows one to capture favorable prices in markets that are trending lower.
* Eliminates storage and interest costs.
* Eliminates the risk of quality deterioration 
 
Disadvantages
* Does not allow the seller to benefit if prices improve in the future.
* Does not allow the seller to capture favorable carrying charges when available in the market.
* Does not allow the seller to benefit from basis appreciation in the market.

Example:  It is July 1st and FREMAR LLC is posting a bid of $3.75 for corn. You bring in a 900 bushel load of corn and instruct FREMAR to sell the corn and go home with a check in your hand.