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DELAYED PRICE / PRICE LATER Contract
FEATURES
* Immediate Delivery
* Futures Market Portion Priced at a Later Date
* Basis Priced at a Later Date
* Payment Received Upon Final Pricing of the Contract
DEFINITION
The seller simply delivers grain to the receiver and is then issued to a delayed pricing contract. The seller of grain has the ability to price the contract in the future at the seller's discretion. The delayed pricing marketing alternative is best suited to the seller of grain who desires the ability to deliver grain at his discretion, but wants to retain the ability to price the grain at a later date. The concept is also suited to a seller of grain who desires to defer income from grain sales into another tax year. In most instances however, the pricing of the contract must be done during the normal futures market trading hours. The ability to price the grain at a later date signals that users of the contract are normally of the opinion that grain prices will rally. Normally the issuer of the contract will assess a monthly service charge that is comparable to the monthly storage rates charged on storage contracts. The issuer of the contract is facilitated when the seller prices the contract. There is normally a provision in the contract that states that the title of the grain passes to the receiver upon delivery. In most instances, the issuer of the delayed pricing contract will require a pricing decline.
ADVANTAGES
* Allows the seller of grain the ability to deliver grain at a time which is convenient relative to the seller's work schedule.
* Allows the seller the ability to price the grain at a later date thus benefiting if the market rallies.
* Allows the seller the ability to defer income until the grain has been priced (i.e. next tax year).
* Depending upon time of delivery this alternative may eliminate the sellers risk of quality deterioration of stored grain.
DISADVANTAGES
* Does not provide any monies to the seller of grain until the contract is priced.
* Does not allow the seller of grain the ability to arbitrage the grain to the best market available upon pricing.
* The use of the contract does not provide guarantees to the seller of the financial strength of the receiver.
* Provides no price protection to the seller of grain in the event the market declines prior to pricing.
* The seller generally must pay a service charge until grain is priced.
* The use of this type of contract may be limited by the availability of transportation to the seller and receiver.
EXAMPLE
On November 1st, FREMAR quotes a price of $1.70 per bushel for corn. You believe prices will improve over the next few months, but your bins are full and you need to move some corn so you can finish harvesting. You enter a Delayed Price Contract with FREMAR. The charge is 4 cents per bushel per month and the pricing deadline is March 31st.
On February 1st, the price for corn at FREMAR is $1.90 per bushel. You elect to price the corn under your Delayed Price Contract. Your net selling price would be $1.78 per bushel, an 8 cent per bushel gain over the $1.70 price offered on November 1st. (1.90 bid less .12 service charge = 1.78 net price)
If the price had not increased, you would have lost money.
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