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Nail down a price floor

Jeff Caldwell 05/24/2011 @ 3:49pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

If you want to guarantee a price floor for your marketed grain, but still have the opportunity to play the market if it swings upward, a minimum price grain contract may be just for you.

That's precisely what a minimum price grain contract can do for you. For a price, you can select a strike price or call option to contract 5,000-bushel increments of grain, but still have the ability to "participate in the market" if prices go higher, says Iowa State University Extension Farm Management Specialist Steve Johnson. It's one way that you can protect yourself in times when markets can move as much in a day as it would have taken a week as little as a few years ago.

"With the amount of volatility in the futures markets, they're a good tool to set a minimum price, but still have the potential for higher prices," Johnson says. "The seller still has the right to participate in the market if it rallies."

Typically, Johnson says, the farmer buys a call option or sets a strike price. Then, a grain merchandiser will charge the farmer a "small fee that will be subtracted when the grain is delivered."

"You have to know how options work; in this case, call options," Johnson adds.

One company that offers minimum price grain contracts is Cargill. They definitely are viable tools during this time when the grain markets are volatile, says Cargill Senior Grain Merchandiser Ray Jenkins. But, sometimes potential sellers are scared off by the price tag.

"In entering an MPC contract, the farmer sells cash and buys a call option. The cost of buying an at-the-money $7.60 July call with a shelf-life of less than 40 days is right at 40 cents," Jenkins says. "Most folks focus on the cost rather than the idea that they are guaranteed a $7.20 cash price (assuming their cash sale was at $7.60).

"They definitely have a use in these wildly volatile times, but many have a mental hurdle in overcoming the initial cost," Jenkins adds.

   

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