Production impacts elevator contracts

FARGO, N.D. – What should be done to your marketing plan if frost or other weather event has sharply reduced your production?
Preharvest marketing strategies generally emphasize selling a high percentage of the crop at favorable prices using elevator contracts and put options.
The use of contracts is usually encouraged up to the guaranteed yield for a revenue insurance product such as Crop Revenue Coverage. Production may be insufficient to meet contracted amounts.
Obligations. A contract generally requires delivery of the specified amount except where the contract includes an act-of-God clause. Penalties may be imposed if obligations cannot be met. Any deviations from the contract are at the discretion of the buyer.
Producers should discuss their contract with the contract buyer as soon as it appears that production may be insufficient. Procrastination may result in fewer alternatives.
Fill on open market? It is possible that a producer can fill the contract by buying grain on the open market.
This alternative may be worth considering if the grain is available within a reasonable distance. Transportation costs and other logistics may render this alternative impractical.
Some buyers offer concessions when the contract has substantial equity. A contract that was entered into when prices were significantly above recent levels would have equity.
A buyer may choose to share that equity with the producer to close out the contract. For example, one elevator offered 50 cents to $1 a bushel to close out corn and soybean contracts with producers as of Aug. 31.
Penalties. Whether a penalty is imposed or equity is shared will depend in part on the buyer’s obligations.
The buyer may have contracted with a miller or exporter that requires delivery or be penalized. Also, the buyer may have contracted for transportation with a penalty for cancellation.
Waiting game. Why wait to settle the contract? Waiting might be a worthwhile consideration if lower prices can be anticipated as a result of increased production.
But, just the opposite situation is being looked at by the trade: somewhat lower production than projected by USDA in the August supply and demand report and, to some extent, higher prices in coming weeks.
For example, while a large world wheat crop will be produced, USDA is projecting that the stocks/use ratio for world wheat will increase very little. Some countries need to use their bigger crop to replenish stocks.
Market outlook. For corn, the stocks/use ratio is expected to increase but not by very much, considering how large a crop is being projected. Demand is strong in both the domestic and export markets.
Any reduction in production will only enhance price prospects. Current expectations are for modestly higher prices from recent lows.
For soybeans, world stocks are expected to be plentiful but only after the South American crop is harvested. World stocks will be at an unusually low level until February 2005.
A huge production increase is expected from Argentina and especially Brazil, but those crops still face many uncertainties.
(The author is a crops economist with the North Dakota State University Extension Service.)