1. Agricultural Marketing
ECON 339X:
Agricultural Marketing
Chad Hart
Assistant Professor
John Lawrence
Professor 1

2. “New Generation” Contracts
Today’s Topic
“New Generation” Contracts

3. Contracting Basic Hedge-to-Arrive Basis Deferred Price Minimum Price
New Generation
Automated Pricing
Managed Hedging
Combination

4. Hedge-to-Arrive
Allows producer to lock futures price, but leaves the basis open
Basis is determined at a later date, prior to delivery on the contract
So the producer still faces basis risk and production risk (must produce enough crop to cover the contract)
The buyer takes on the futures price risk

5. Hedge-to-Arrive Why might you use it?
Think basis will strengthen before delivery
For the producer, the gain/loss on the contract is due to basis moves
Available in roll and non-roll varieties

6. Basis Contract Also known as a “fix price later” contract
Allows producer to lock in basis level, but leaves futures price open
Producer still faces futures price risk and production risk
Buyer takes on basis risk

7. Basis Contract Why might you use it? Example
Expect higher futures prices, but possibly weaker basis
Example
On July 1, producer sells 5,000 bushels of corn for November delivery at 20 cents under December futures.
On Nov. 1, Dec. futures set the futures price

8. Deferred Price Contract
Also known as “no price established” contract
Allows producer to deliver crop without setting sales price
Buyer takes delivery and charges fee for allowing price deferral
Producer still faces all price risk and production risk (if contract is set before delivery)

9. Deferred Price Contract
Producer also faces counterparty risk
If buyer files for bankruptcy, the producer becomes an unsecured creditor
Why would you use it?
Believe market prices are on the rise
Takes care of storage
Allows producer to lock prices at a later time
Producer benefits from higher prices and stronger basis, but risks lower prices and weaker basis

10. Minimum Price Contract
Allows producer to establish a minimum price in exchange for a service fee and the cost of an option
The final price is set later at the choice of the producer
If prices are below the minimum price, the producer gets the minimum price
If prices are above the minimum price, the producer captures a higher price

11. Minimum Price Contract
Removes downside price risk (below minimum price) and allows upside potential (after adjusting for fees)
Producer looking price increases to offset fees
Provides some predictability in pricing, can be set to be cash-flow needs

12. New Generation Contracts
Ever evolving set of contracts established to assist producers and users in marketing crops
Structured to overcome marketing challenges
Inability to follow through on marketings
Marketing decisions triggered by emotion
Complexities and costs of marketing tools

13. New Generation Contracts
Often broken into three categories
Automated pricing
Managed hedging
Combination contracts
Offered by several companies, each with its own twist on the contract
I will highlight some available contracts (for illustrative purposes only, not an endorsement

14. New Generation Contracts
The contract follow predetermined pricing rules
Often sold in set bushel increments, like futures and options, with a specified delivery period
Some have exit clauses (depending on price)

15. Automated Pricing
In its purest form, basically locks in an average price by marketing equal amounts of grain each period within a set time
Could be daily or weekly
Some contracts allow producers to pick the pricing period
Can be combined with other pricing approaches (minimum price, etc.)

16. Automated Pricing Examples Variations AgriVisor – Index Pricing
E-Markets – Market Index Forward
Cargill – PacerPro
CGB – Equalizer Classic
Variations
CGB – Equalizer Traditional
Cargill – PacerPro Ultra
E-Markets – Seasonal Index Forward

17. Automated Pricing Pricing period: Jan. to Mar. 2011
on Nov soybean futures

18. Automated Pricing Advantages
Automates marketing decision, frees up producer time
Removes concerns about additional costs (margin calls)
Can be set to capture average price when seasonal highs are usually hit

19. Managed Hedging
Automated contracts that implement pricing based on recommendations from market analysts
Example
Cargill – MarketPros
Producers can choose to follow CargillPros or Kluis Commodities recommendations

20. Managed Hedging Has many of the same advantages as automated pricing
Results are dependent on the performance of the market analysts
Often has higher fees than automated pricing
Automated pricing: 3-5 cents/bushel
Managed hedging: cents/bushel

21. Combination Contracts
Extend or combine mechanisms from various contracts
Averaging pricing
Minimum pricing
Pricing based on market movements
Opt-out clauses if prices fall significantly
Come in many varieties, so producers can find one to fit their needs

22. Cargill – DiversiMax Price is set by formula
75% of the price is determined by the average daily high futures price during a specified pricing period
25% of the price is determined by the highest price observed during the pricing period
Can be linked to a commitment to market additional grain (the commitment reduces the fee charged)
Source:

23. If the Nov. 2011 soybean price is
AgriVisor
Accelerator Pricing
Markets bushels when prices exceed a floor price, but marketed quantities depend on price level
For example,
If the Nov soybean price is
Then we market
< $12.00
0 bushels per day
$12.00 to $13.00
100 bushels per day
$13.00 to $14.00
250 bushels per day
> $14.00
500 bushels per day
Source:

24. AgriVisor Topper Pricing
Markets bushels when prices exceed a floor price on days where prices have jumped sharply
Example: Markets bushels when prices exceed $13.00/bushel on days where prices have increased by at least 15 cents/bushel
Takes immediate advantage of market rallies
Source:

25. AgriVisor
Source:

26. AgriVisor
Source:

27. FC Stone Accumulator Contract Versions for producers and consumers
Key parameters:
Accumulator price – price grain is sold (or bought) at
Knockout price – price that terminates the contract
Weekly bushel sales commitment
Has acceleration function if price move beyond accumulator price
Source:

28. FC Stone – Accumulator Quantity marketed doubles
Normal quantity marketed
Contract ends
Source:

29. FC Stone – Consumer Accumulator
Contract ends
Normal quantity bought
Quantity bought doubles
Source:

30. Class web site: