Here to Help
Managing market risk can be daunting, whether you’re a seasoned user of marketing contracts or just beginning to use grain pricing tools. Below are brief contract descriptions that can help get you started. If you haven’t used contracts in the past or would like more information about marketing strategies, please give the SDWG Grain Marketing Department a call at 1-888-429-4902 or email us.

There is an inherent risk in grain marketing. Grain marketing decisions are the decision of individual producers. South Dakota Wheat Growers assumes no responsibility for grain marketing decisions made by individual producers.

Grain Pricing Tools*
The following are used in formula contracts (HTA or BF) to establish the Board component of the price. These contracting tools can help remove some of the stress and emotion from the decision-making process for some producers.

E-Markets DRC Contracts:

Market Index Forward Model
Seasonal Index Forward Model
Trend Trail Model
Floored Average
Cash Plus
Price Builder Contract
Price Builder Bonus Contract

Grain Purchase Contract Recaps:

Priced Contract (PC)
Basis Fixed Contract (BF)
Hedge To Arrive Contract (HTA)
Minimum Price Contract (MP)
Target Price Agreement (OP, OB, OH)
Delayed Pricing (DP)

Market Index Forward Model: Prices equal amounts of futures each trading day of the pricing period.

Seasonal Index Forward Model: Takes advantage of seasonal price patterns by pricing more futures during periods of historically higher prices.

Trend Trail Model: Rides a price rally and automatically prices futures at the first downturn.

Floored Average: This marketing agreement allows you to establish a minimum futures floor price, but also allows you to participate in the upside. The Floored Average contract pays you the average futures price over a set period of time. However, you are guaranteed no worse than a pre-defined floor price.

Customer Advantages 

• The producer is guaranteed the higher of the average futures level or the floor price. 
• The average price is specified. 
• Flexibility to establish basis anytime prior to delivery. 
• Removes the stress, frustration, and risk of decision making with marketing.

Customer Disadvantages

• The contract is sensitive to the timing.
• Does not capture all the gains during a volatile market.

Cash Plus: This contract works when a producer sells old-crop bushels on a spot sale or on a forward priced contract. In addition, the producer makes a firm offer and receives a premium on the old-crop contract for an equal amount of grain of the old-crop contract, at a specific strike price.

Customer Advantages

• Quantity and price is fixed on old-crop with no further price risk.
• Quality risk is passed to buyer on the old-crop.
• Money is immediately available on the old-crop.
• Premium is paid on old-crop bushels and is tied to a firm offer of an equal amount of grain at a specific strike price, for a future delivery period.

Customer Disadvantages

• Pricing flexibility and delivery are eliminated.
• No chance for further price increases on old-crop.
• Firm offer becomes a future fixed contract, only if the futures trade above the strike price at the close of the trade on the contract expiration date.

Price Builder Contract: This contract prices equal numbers of futures at the floor price each trading day the market trades above the knockout price, up to the target price at the close of the day. The floor price is offered at a premium to the futures price at the time of the contract creation. This contract will price until the contract expiration date or the knockout price is reached and the contract ends.

Customer Advantages

• Can participate in market upside up to the target price.
• Accumulates priced bushels daily at minimal costs.
• The futures floor price is established above futures price at contract initiation.
• Flexibility to establish the basis anytime prior to delivery.
• Reduces stress, frustration, and risk in making daily marketing decisions.

Customer Disadvantages

• Remains subject to the basis level fluctuations until the basis is established.
• Uncertain of the amount of basis to set.
• May not price all bushels on the initial contracted bushels.
• The daily futures settlement price may not exceed the target price.
• The pricing opportunity is range bound.

Price Builder Bonus Contract: This contract prices equal numbers of futures at the floor price each trading day the market trades above the knockout price up to the target price at the close of the day. If the futures price closes above the target offer price at expiration and the contract has not been knocked-out, additional bushels equal to the initial number of bushels offered in the contract are priced. The floor price is offered at a premium to the futures price at the time of the contract creation. This contract will price until the contract expiration date or the knockout price is reached and the contract ends.

Customer Advantages

• Can participate in market upside up to the target price.
• Can participate in a market upside up to the target/offer price, if a contract with a target/offer price above the floor has been chosen.
• Accumulates priced bushels daily at minimal costs.
• The futures floor price is established above futures price at contract initiation.
• Flexibility to establish the basis anytime prior to delivery.
• Reduces stress, frustration, and risk in making daily marketing decisions.

Customer Disadvantages

• Remains subject to the basis level fluctuations until the basis is established.
• Uncertain of the amount of basis to set.
• May not price all bushels on the initial contracted bushels.
• The daily futures settlement price may not exceed the target price.
• The pricing opportunity is range bound.
• Has the obligation to deliver additional bushels if the futures price exceeds the target/offer price at expiration.

*Offerings subject to change without notice. The above contracting tools involve market risks and may not be appropriate for all producers.

Grain Purchase Contract Recaps

Priced Contract (PC): A contract with a fixed (final) price for a specific delivery requirement. This contract is also referred to as a “flat price” contract.

Customer Advantages

• Quantity and price is fixed, with no further price risk.
• Quality risk is passed to buyer.
• Money is immediately available.

Customer Disadvantages

• Pricing flexibility and delivery are eliminated.
• No chance for further price increases.

Basis Fixed Contract (BF): This is a formula price contract. The formula to determine price is: basis + board of trade price. At the time of contracting, the basis is established, and final price is then determined when the board price is set. Board price must be set prior to expiration date in the contract. BF contracts may be rolled forward to another board contract month, at the spread between the futures months, plus a fee for a contract change.

Customer Advantages

• Downside basis risk is eliminated.
• May take advantage of future CBOT rallies.
• May avoid a weak (harvest) basis or low flat price.
• Can receive an advance of 50% of contract value (ex. $2.00 cash price: advance $1.00 per bu.).
• Quality risk passes to buyer.
• Avoids storage or price later charges.
• No minimum bushel requirements.

Customer Disadvantages

• Future basis improvements cannot be realized.
• You remain subject to the risk of changes in the CBOT futures prices.
• Requires knowledge of local historical basis.
• There is risk in FC asking for additional equity in case cash values fall below advancement levels.

Hedge To Arrive Contract (HTA): This is a formula price contract. The formula is: basis + board of trade price. At the time of contracting, the board price is established, and final price is then determined when the basis is set. The basis must be set prior to time of delivery or before the contract expiration date.

Customer Advantages

• Takes advantage of high futures levels, leaving opportunity for basis to improve.
• Futures downside price risk is eliminated.
• No margin calls or exchange fees and can eliminate storage costs.

Customer Disadvantages

• Open to basis level widening.
• Cannot take advantage of futures rallies.
• Cannot trade in and out of HTA contracts as with futures contracts.
• The title of the grain is transferred.
• The delivery of the contract is mandatory.
• Payment is not received until basis is set and the grain is delivered.

Minimum Price Contract (MP): This contract establishes a guaranteed “minimum” price, while also allowing the contract to be “re-priced” at seller’s option, if market conditions allow. The final price will be the minimum price plus a formula (established in the contract) increase, if and when repriced.

Customer Advantages

• Risk of price decline for both basis and CBOT is eliminated.
• Upside CBOT potential is not restricted.
• The minimum price is guaranteed and paid in full upon completion of delivery.
• Requires no upfront charges, fees, or margin money.
• May cost less than commercial storage rates.
• Quality risk passes to buyer upon delivery.
• Premiums are based on CBOT traded futures options.
• Very safe and the costs are easily identified.

Customer Disadvantages

• Does not permit trading in and out of markets as delivery is expected.
• Depending on option prices and volatility, it may cost more than storage rates.
• The basis is locked in, so one cannot participate in further basis improvements.
• Requires selling 5,000-bushel increments.
• Pricing must be done before deadline or premium is forfeited.

Target Price Agreement (OP, OB, OH): Producers may enter into an agreement, whereby they make firm “offers” to enter into a cash grain contract with SDWG. We will then “accept” that offer if market conditions allow.

Customer Advantages

• Price targets can be reached if you are not able to monitor the markets minute by minute.
• Takes advantage of short-lived day rallies, if your offer is in the quote system.
• If you have a price goal in mind, it puts it in writing and gives you something to watch and monitor.
• Any price amount and bushel quantity can be offered.
• Offers can be used to price cash, storage, or new-crop delivery grain.
• Offer to sell may be cancelled by seller anytime, providing notice has been received by buyer prior to offer being filled.

Customer Disadvantages

• The grain will be priced at an offer, and if the market rallies past the set offer, additional gains will not be realized.
• Putting offers to sell at even dollar amounts can sometimes be costly. An example is an offer to sell $2.00 corn, and the price is $1.99; then, the market falls to $1.50. Fails to “pull the trigger.”

Delayed Pricing (DP): This contract allows a producer to move grain to a SDWG location without establishing any price. Charges vary with market conditions. It is important to note that, unlike storage, title to the grain passes to the buyer upon delivery. Producers will not be able to use price later grain as collateral for government loans or Loan Deficiency Payments (LDP). Service charges are based on market differentials (carries/inverses) and may or may not be less than storage charges.

Customer Advantages

• Can make delivery while avoiding historically low (harvest) prices.
• The emotionalism of pricing is separated from the physical handling of the grain.
• Do not need on-farm storage, and price later may be cheaper than commercial storage.
• Quality risk passes to buyer upon delivery.
• On free price later, it allows producers to move grain when they have time; then they can sell it in any bushel amount, when they decide.
• Corn is shrunk to 15% moisture vs. 14% on storage and warehouse receipts.

Customer Disadvantages

• Subject to basis and CBOT price risk.
• No payment until contract is priced.
• This is not STORAGE! Title passes to buyer and you are unable to get a CCC loan or LDP once put into price later.