A big drop in prices has farmers understandably reluctant to sell, but the grain industry still needs to grind, process, ship, and otherwise do what it does with grain every day, and grain handlers still need to manage logistics, grain quality, and cash flow.
Deferred Price (also known as “Price Later,” “NPE,” or “DP,” among others, depending on geography) is a way to get all the above happening in an environment where grain is hard to buy.
It’s a way – but is it a good way? As with so many things, the answer is “it depends.”
Deferred Price passes title of the grain to a new owner so that all of the things mentioned previously can happen. However, the original owner retains the right to set the price during some specified time window. For fall crops, this is often either during the summer before harvest or around the start of the next harvest.
That means the title holder is selling grain that will have to be bought later at some as yet unknown value. Is this a problem? Again, it depends.
Here are some questions to ask before you sell Deferred Price grain:
- Is this a good sale?
The need to use or ship grain doesn’t always coincide with a good basis value to sell that grain. If you are going to sell something now, and you must buy it later, starting with a good sale is important.
- Is it still a good sale after I adjust it for spreads?
Right now, a corn sale at +5H is worth about -5K, -13N, and -18U. The carry spreads make the sale worth less over time. This doesn’t automatically make the sale bad, but it must be part of the consideration.
- Am I collecting fees?
Free Deferred Price has become common in recent years, and it makes sense when spreads are inverted and space is less valuable. When space is tight and spreads are at a carry, it makes much less sense. But after a few months of slow selling, we’re starting to see it pop up again.
If you are selling short into a carry market and have no fees to cover the risk, you are taking on the full risk expressed in question 2.
- How valuable is the money?
Selling Deferred Price grain means you get paid for it, and since you don’t have to pay the original owner yet, that money works for you until you do. Whether you are paying down a credit line or funding operations, there is some value there. Whether it exceeds the basis and spread risk depends on the commodity and interest rate in question.
The best-case scenario in grain trading is to have basis, spreads, fees, and interest all working in your favor. It’s often impossible to get all four working for you at the same time, but the more of them you do without, the harder it is to have a good outcome.
Jeff Reardon : May 5, 2015
Sherry Lorton : Oct 16, 2019