MARKETING ALTERNATIVES

Transcription

1 2018 CONTRACT GUIDE

2 MARKETING ALTERNATIVES We, at Crossroads Cooperative Association, would like to offer various marketing alternatives to our producer customers. Each alternative has its place and value in a total marketing plan. However, no alternative is risk free. Some are more risky than others. Some alternatives require more attention as to market movement. Each has a benefit but also a cost either in terms of time, money, or risk assumed. The marketing alternatives we can offer include: Cash contract Basis contract No Price Established (price later), (DP) contract Minimum Price contract Deferred Payment contract Futures Only (hedge to arrive) contract Price Target Offer New Crop Average Price Crossroads reserves the right to not offer certain contracts, per market conditions.

3 CASH CONTRACTS PURPOSE: WHEN TO USE: ADVANTAGES: PITFALLS: EXECUTION: To establish a fair market price when the price is satisfactory. 1. When you feel the market is at a good price. 2. When you feel the market is going lower. 3. When you need to move grain. 1. Most common method of selling grain. 2. Simple and straight forward procedure. 3. Can be priced for a delivery period far into the future. 1. There is no potential for price improvement if the market rallies. 2. Transfers the title of the grain to the buyer. 3. The grain must be delivered during the specified delivery period. 1. Establish a price and delivery period. 2. Deliver the grain during the delivery period. 3. Collect the proceeds for the grain after delivery.

4 BASIS CONTRACTS PURPOSE: WHEN TO USE: ADVANTAGES: PITFALLS: EXECUTION: To lock in a good basis level when the futures price is not satisfactory. 1. When the futures are trading low, reflecting a low cash price and the basis is high. 2. To allow delivery of the grain and yet allow for price movement. 1. Lets you move the grain even though you may not be ready to price it. 2. Lets you lock in a basis without establishing a futures (flat price) on the contract. 3. Allows you to stop storage charges or deferred pricing charges on grain already delivered. 4. May be rolled forward to the next futures Month at the buyers option. ( 1 CENT TO ROLL ONCE ONLY) 1. Can be a losing transaction in a down market. 2. Can be risky at times when the market is volatile 1. A basis is established before delivery. 2. A futures price may be established either before or after delivery. 3. After delivery is completed and the futures price is established, a 100% settlement can be made.

5 PURPOSE: NO PRICE ESTABLISHED CONTRACTS (PRICE LATER CONTRACT, (Deferred Price) Allows delivery of grain without establishing a price until a later date. WHEN TO USE: 1. When you want grain in position to sell but are bullish the market. 2. When service charges are less than storage charges and you are storing your grain in commercial storage. ADVANTAGES: 1. The service charge for this contract may be cheaper than storage. ( VARIES WITH MARKET) 2. Maintains opportunity for basis and futures movement. 3. May be priced at any time, usually within the current crop year. 4. Service charges are not assessed until the grain is priced.

6 PITFALLS: 1. Service charges may change if the grain is not priced within the contract term (usually 9-12 months). 2. If the market moves lower, you are not protected and service charges continue to increase. 3. You have transferred ownership of your grain to the elevator, although you retain the right to price it within the contract terms. EXECUTION: 1. Establish a delivery point and service charges. 2. Deliver the grain and have it applied to your contract. 3. Price the grain before the expiration date on the contract. 4. Collect the proceeds for the grain, or defer them into another tax year.

7 MINIMUM PRICE CONTRACTS PURPOSE: WHEN TO USE: To sell grain and lock in a minimum price you will receive, yet allowing for a price improvement with no down side risk. 1. When the cash price is good but you feel the market will go higher. 2. To allow delivery and payment for your grain, but maintain potential for a price improvement. 3. When there is a possibility that the futures market may go up significantly. 4. To reduce the market risk of selling new crop grain prior to harvest. 5. To establish a floor under the market. ADVANTAGES: 1. It allows you to sell the grain at lower prices but pays you if the market goes up. 2. Generates cash after the contract is delivered. 3. Protects your deficiency payment in times of rising markets. 4. No margin calls. 5. Minimum price charges are subtracted when the grain is settled.

8 PITFALLS: 1. You will not benefit in a down market. 2. You will not benefit in a sideways market. EXECUTION: 1. Cash grain is priced. 2. A futures price is established with a strike price, along with a final pricing date and the premium cost of the contract. 3. The minimum price is established by subtracting the premium from the base price of the contract. 4. A futures price must be established before the expiration date of the contract or the minimum price is the final price.

9 DEFFERED CONTRACTS PURPOSE: To allow the customer to deliver grain, sell it at a fixed price, and receive payment at a designated time in the future. In general, interest will be paid to the customer from the time of completion of delivery until the customer receives the payment at the agreed time in the future. The contract is essentially just a cash contract with payment deferred to a future date. WHEN TO USE: 1. When you do not want any more income in the Current tax year. ADVANTAGES: 1. Allows the customer to defer income until wanted or needed. 2. Customer may receive a premium on a deferred amount. 3. Actual price per bushel is established so that there is no risk of a declining market.

10 DEFFERED CONTRACTS PITFALLS: 1. Because the cash price is established, the customer is not able to take advantage of market rallies. 2. You have delivered the grain, but do not leave the elevator with payment. 3. Although the customer may receive a premium, there may be better opportunities to earn a return on the proceeds with other investment options. EXECUTION: 1. Grain is priced. 2. Contract must be signed at time of settlement. 3. Once the contract is signed it is binding to all parties involved

11 FUTURES ONLY CONTRACTS (HEDGE TO ARRIVE) PURPOSE: To lock in futures price without establishing a basis WHEN TO USE: 1. When the market is peaking and heading lower. 2. When the futures price is good but the basis is heading lower. 3. When the seller does not choose to use the futures market through a broker. ADVANTAGES: 1. Flexibility in delivery period and location. 2. No margin calls. 3. Allows for basis improvement without the futures risk.

12 FUTURES ONLY CONTRACTS (HEDGE TO ARRIVE) PITFALLS: 1. The price of the futures market could go higher. 2. The basis could widen possibly causing a lower cash price. EXECUTION: 1. Lock in futures price during the regular trading hours. 2. The basis portion of the contract must be made prior to settlement. 3. Payment occurs after the contract has been delivered.

13 PRICE TARGET OFFER PURPOSE: WHEN TO USE: ADVANTAGES: Allows customer to select flat cash price at which he is willing to sell delivered Crossroads, at the customers bin, or a cross-country point. 1. When the market reaches these offers, the grain is automatically contracted at the firm offer price. 1. Customer does not have to constantly watch market. 2. If the market moves quickly, orders can be filled. PITFALLS: 1. No protection on downside. 2. Market could move higher after grain is locked to a price.

14 New Crop Average Pricing Contract The Crossroads Average Pricing Contract is designed to take the stress out of pricing your grain and give you the benefits of dollar cost averaging in your marketing plan. The contract has a sign-up deadline and no bushels will be accepted into the program after that date. How it works Sign up date deadline is 2/20/18 -new 2018 corn and 3/6/18 for 2018 wheat, 8/15/18 for 19 crop wheat. Patron commits a certain amount of bushels to be marketed between. (2/21/18 thru 7/5/18 for 2018 corn and 3/7/18 thru 6/27/18 for 2018 wheat) - (8/15/18 thru 12/12/18 for 2019 wheat) total of 20 pricing periods for corn and 18 for wheat. Every Wednesday an equal amount of bushels will be priced at the board closing price, (harvest futures month, ex. KWN 18,19( wheat), ZC19(corn) Price out option- If patron decides to price remaining bushels at any time prior to the final pricing date. (1 cent fee) Basis can be set at any point prior to delivery Bushel Minimums. Example Farmer commits bushels of corn to APC. Futures will be set on 250 bushels, each Wednesday on the close, through the contract period. Basis can be set at any time but only for the whole contract. If not set by producer it will be automatically set on first day of delivery. Contract Fee for 2018 $0.00/bushel service fee $0.01/bushel early price out fee.

15 2/22/17 THRU 6/21/17

16 8/17/17 THRU 12/13/17