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.
- 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.
- 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.