Evaluate your crop delivery arrangements to avoid hidden risks
Advanced marketing agreements and contracts may have new meanings if this year’s crop falls short on the delivery bushels needed.
July 9, 2012 - Author: Dennis Stein, Michigan State University Extension
Much of the U.S. is reporting dry summer conditions and with the lack of water comes the greater possibility for a reduction in the potential 2012 crop production. A reduction in crop yields has led to some increases in market prices, most of which are now heading for two year highs.
For farms that have done some advanced marketing of crops using cash forward contracts, hedge to arrive or some futures or options contract, now is an important time. As a farm producer that has a delivery contract, you need to know the exact terms of that contract and what will be the impact of not having enough bushels to cover that contract if your crop fails.
The key is to know the details of the fine print, you need to know the terms and options that you have in your delivery contract and evaluate your options, responsibilities and opportunities to fulfill your obligations.
In some agreements the producer is required to deliver the actual bushels. This may mean that the producer will need to go out into the market and physically purchase bushels at whatever cost and location to make the required delivery. These contracts are normally with firms that use the corn or soybeans in product production. Because they would be forced to go out and find any bushels that you are short in your contract, they have put that responsibility on the producer. Finding and purchasing bushels in a short crop year may not be easy and can become very expensive very quickly. It is common for local producers to hold back on selling their harvest in a short crop in hopes of higher prices later in the marketing year. This adds to the difficulty in finding bushels of commodities to purchase and deliver to fulfill your contract.
Why start looking at options now? It is always a good business practice that if you see a potential problem in making full delivery of your crop bushels or making your delivery in a timely manner that you inform the firm that holds the contract. Go over the situation, fully review and understand your obligations. Then work with the firm to map out options and strategies that will help your meet the contract requirements.
The theme here is to dig out your contract and read the fine print today and work to develop a strategy of what options you have and what it will take if you’re 2012 crop falls short of the bushels needed to fulfill your contract obligations.