It seems like each crop year that comes around brings new types of contracts with new promises. Of course, the years of low prices that make it harder to buy grain mean even more contracts with even more bells and whistles. It's enough to make your head spin.
Many times, the "new" contracts are really just new names for old contracts. To say it as kindly as I can, they didn't change the names of these contracts because they worked out well for the people who used them.
Once you get outside of simple, straightforward contracts where everybody knows exactly what they are getting into, there can be some troubling unknowns: what price is sold, what basis is sold, how many bushels are sold, etc. We all know when one of those goes wrong, they can go terribly wrong. All too often, more than one of those things can go wrong at the same time.
Of course, the reason these contracts come about is because they can work great if conditions are right. So, the key is to truly understand all the possible outcomes of each contract BEFORE you enter into it. This can be a challenge in and of itself because, much of the time, the person promoting the contract doesn't even know how it works.
Here are a couple of ways to look at new or unknown farm marketing contracts that can help make sure you fully understand the risks involved:
1) Understand that there is no such thing as a premium without a transfer of risk. If the contract offers to give you a higher price, a new farm bin, an iPad, or something else, they are also asking you to accept some risk. Discovering that risk will be difficult as the buyer typically is more trained on explaining the benefits than explaining the risks, but understand there is risk there and you should know what it is before you sign the dotted line.
2) Ask extreme hypothetical questions. What if prices go to $1.00 and I don't make a crop? What if prices go to $87.00 and I don't make a crop? What happens if basis goes to -300? +400? You get the idea. Questions like these tend to flesh out the weaknesses in these contracts.
For an in depth discussion of how many of these farm marketing contracts work and how to compete with them or use them, click below for information on our Grain Origination Course.