Blogging by the Bushel
With numerous challenges over the past several years for producers, we at Mercer Landmark understand the need for a comprehensive risk management solution. We seek to provide our customers with unparalleled service to ensure maximum results.
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A Minimum Price Contract (MPC) can be a useful marketing tool for producers in supply driven bear markets. These types of contracts were very popular prior to the bull market run that began in 2006. It’s very likely that we are entering a sustained period of lower prices given the massive surpluses that we have built up around the world. However, this does not mean that we will not see opportunities to price if we see some weather scares or unforeseen geopolitical events. It’s easy to sell corn at $6 or $7 and never look back because it represents such a good return. However, the challenge in a low priced environment is to eliminate the down side price risk, while maintaining some sort of upside potential during a predetermined time period. A Minimum Price Contract can accomplish both.

For example, instead of delivering corn into Delayed Price this fall, consider selling some bushels on a Minimum Price Contract. Bushels placed in DP might cost you 15c flat right up front and then a monthly rate of 3c per bushel. You have full upside price potential, but you also have full down side price risk. This is not a good risk/reward scenario. Many advisors still believe that corn could drop another 40-50c. Nobody really knows for sure if that could happen. However, we would suggest that you price a portion of those bushels by selling them today (flat price with futures reference and basis) and then attach a long call feature to provide you with upside potential if the market rallies later. A call feature gives the buyer the right to be long at a pre-determined value called the “strike price.” March corn futures are closed Monday Monday night at $3.39 right now. A March $3.40 “strike price” call feature would cost roughly16c. If the market continues to decline, the down side risk is covered because the corn was sold, but the buyer would be out the 16c investment on the call feature. However, if the market rallies above the $3.60 strike price, the buyer of the call feature would participate in the rally penny for penny (less the 16c investment) until the call feature is liquidated. The call feature used in this example expires in February, but it would still be around half the cost of DP charges out to February.

These programs can be tailored to fit different time frames out to May or even July with different costs involved. They can also be used for soybeans. It’s never a good idea to do too much of the same thing. We like a blended marketing approach that would include this type of contract. If you have any questions on these types of contracts, please give your Mercer Landmark grain originator with any questions.

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