Beach Cooperative Grain Company

Contracts Offered  01/03/17 4:33:28 PM

What makes up the price?
The first thing you need to understand is how cash price is made up. The cash price is the futures price plus the basis.
Futures + Basis = Cash Price
The futures price is a reflection of the value of grain at a neutral delivery point and is based on the futures transactions of buyers and sellers around the country. This number is predominantly controlled by the supply of the commodity and the demand for its usage.
The basis is set by the exporters, processors, and elevators. It is a combination of freight costs, the local overhead expenses, and our margin. When an elevator buys grain with the basis set they are able to ship it with little to no risk. Shipping grain the farmer has not set the basis on is an extremely risky decision for an elevator.
Types of Contracts Offered
Cash Contracts
Cash contracts (also known as purchase contracts or flat price contracts) are the safest and most common contracts. Cash contracts lock in your delivery period and both the futures and the basis, and therefore your cash price.
Basis Contracts
Basis contracts allow the farmer to deliver grain without having to set the cash price. These types of contracts are extremely beneficial to a farmer when they expect the futures price to go up. There are no additional charges for these contracts as the elevator has taken basis ownership already and can ship with little to no risk.
Example: Spring Wheat basis contract is made with Beach Coop at -0.50. The futures the day the contract was made were at $5.10. One month later the futures price had risen to $5.50. The grower then locks in the futures price giving him a cash price of $5.00.
Futures + Basis = Cash
$5.50 + - 0.50 = $5.00
Conversely if the futures price were to move from $5.10 to $4.90 when the farmer locked it in the cash price would then be $4.40.
Futures + Basis = Cash
$4.90 + - 0.50 = $4.40
Futures prices are generally volatile, and therefore basis contracts require the seller to pay more attention to the futures price.
If you know the cash price you would like to receive Beach Coop will put in an “Open Order” in the futures market which will automatically fill if the futures trade to that price.
Futures Only Contracts
Futures only contracts, or Hedge to Arrive (HTA), contracts are similar to a basis contract in that you only lock in one component. With this contract though you are locking in only the futures price and leaving the basis open. You are also opening up flexibility on the delivery month by having two to three months to choose from for setting the basis. This contract is especially beneficial when trying to plan for the upcoming crop year when the local basis has not yet been set. Typically basis is not as volatile as futures.
Example: Next September Spring Wheat has a futures price of $6.00. You know that even with a typical harvest basis and average yield you can make money at that level and you want to hedge a percentage of next year’s crop. You decide to lock in the futures at $6.00. Over the summer the elevator offers a basis of – 0.40 for new crop delivery which you decide to lock in. You now have a cash price of $5.60.
Futures + Basis = Cash
$6.00 + - 0.40 = $5.60
Futures only contracts have a service fee of $0.005 (half a cent) per bushel per month until the basis is locked in. Once basis is locked in the service charges stop.
Price Later Contracts
Price Later contracts, or delayed price contracts, don’t lock in either futures or basis and therefore leave cash price open to full risk. The elevator will charge a certain amount of money per bushel per month to account for the value of their space. Price later bushels are technically owned by the elevator, but it is extremely risky to ship them. In order for a price later contract to make sense the value of the grain at the time of sale must be greater than the value of the grain at the time of delivery PLUS the accumulated price later charges.
Example: Grain is delivered while futures are at $5.75 and basis is at -0.40 giving a current cash price of $5.35. The grower decides to wait to price their grain and places it on a price later contract at 5 cents per month. Seven months later the grower decides to cash out while futures are at $6.00 and basis is at -0.35. Despite the fact that both the basis and futures got better, the cash price is lower due to the price later charges.
Futures + Basis - PL Charges = Cash
$6.00 + - 0.35 - 0.35 = $5.30
If you lock in the basis on a price later contract your price later charges will stop as of that day. You are not able to lock in just the futures on a price later contract since it is grain that has already been delivered.
Act of God
From time to time Beach Coop will offer Act of God contracts. These are most typical on flat price commodities like peas, lentils, and occasionally durum. These contracts help protect a price even from a complete crop failure. These contracts must be accompanied by our Act of God Contract Addendum.
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