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Marketing

Successful marketing can be one of the most perplexing and challenging facets of land ownership and farm management. Many farm owners, as well as farmers themselves, experience difficulty in this area due to a lack of understanding of the basic terms and principles involved in the marketing process. It is of vital importance to stay informed and educated when marketing your grain. The goal of this section is to give you a better understanding of some of the more commonly used phrases, terms, and techniques applied the marketing arena.

On this page you will find a GLOSSARY OF TERMS followed by an explanation of GRAIN CONTRACTS. The information and definitions on this page were taken from, and used with the permission of the Montana Grain Growers Association ©Copyright 2000. Theirs is one of the best web sites I have found that uses everyday language to explain agricultural marketing terms as it applies to risk management. It is full of useful knowledge as it applies to the farmer and landowner alike. There is a subscription fee for the full use of their site, but a great deal of information available is free.

You may visit their web site at www.montanamarketmanager.org


Glossary Of Terms

At-the-money
An option whose strike price is equal - or approximately equal - to the current market price of the underlying futures contract.
Basis (Cash Grain)
The difference between a cash grain price and a futures price. More exactly, basis is cash minus futures (i.e., the cash price of grain at a specific point minus the price of an appropriate futures contract).
Basis Contract
A contract initially unpriced, but with a fixed differential versus a futures contract set in the contract.
Bear Market (Bear/Bearish)
A market in which prices are declining. A market participant who believes prices will move lower is called a "bear". A news item is considered bearish if it is expected to produce lower prices.
Bear Spread
To sell a nearby instrument or asset and buy an equal quantity of a more deferred period (e.g., to sell January and buy March soybean futures is a "bear spread").
Bid
An "offer" to buy, at a specified price or basis. The grain trade, among others, commonly refers to a proposal to buy as a bid and a proposal to sell as an offer.
Broker
Agent who gets a buyer and seller together by executing their orders. Much like a real estate broker, a grain broker does not acquire title or assume risk. He simply charges a fee for executing an order.
Bull Market (Bull/Bullish)
A market in which prices are rising. A participant in futures who believes prices will move higher is called a "bull". A news item is considered bullish if it is expected to bring on higher prices.
Bull Spread
To buy a nearby instrument or commodity and sell an equal amount of a more deferred period (e.g., to "buy March/sell May" is an example of a corn futures "bull spread").
Buy In
To purchase grain commercially in order to fill an existing sales commitment. A buy-in can also be made by the buyer in the original trade for the account of the seller in the original trade, if the seller has failed to fulfill the contract commitment.
Call
An option that gives the buyer the right to buy something at a specified price (the strike price) for a fixed length of time. In the grain trade, calls usually refer to options on futures.
Carrying Charges (Reference Values)
The amount by which shipments in the future exceed values for more nearby shipment slots. What the market is paying for grain storage. Carrying charges can exist in the futures (spreads) and in the basis (cash grain carries being the sum of the two.) Often shortened to quot;carry."
Carryover
Grain and oilseed stocks not consumed during the marketing year and "carried over" into the next marketing year.
Cash Commodity
The actual physical commodity as distinguished from the futures contract based on the physical commodity. Also referred to as actuals.
Cash Market
A place where people buy and sell the actual commodities.
Charting
The use of graphs and charts in the technical analysis of futures markets to plot price movements, volume, open interest or other statistical indicators of price movement.
Close (The)
The period at the end of the trading session, officially designated by the exchange, during which all transactions are considered made "at the close"
Commission
A fee charged by a broker to a customer for performance of a specific duty, such as the buying or selling of futures contracts.
Confirmation Of Trade
In the grain, feed and processing industry, a "confirmation of trade" generally is deemed to be a writing confirming an oral contract already made by the parties. The NGFA Trade Rules set forth specific requirements for such confirmations in NGFA Grain Trade Rule 6, NGFA Feed Trade Rule 2 and NGFA Barge Freight Trading Rule 2.
Contract
In the grain, feed and processing industry, an agreement between buyer and seller that a court or arbitration committee will enforce. Contracts may be formed orally, but state-enacted versions of the Uniform Commercial Code (UCC) generally require that contracts must be evidenced by some writing if involving the sale or purchase of goods worth $500 or more. Such writing can either be an agreement signed by both parties or a confirmation evidencing the parties' agreement. Under the UCC, a written confirmation(s) exchanged between "merchants" is deemed evidence of the formation of a contract between the parties. Likewise, the UCC provides that conduct by both parties which recognizes the existence of a contract can be sufficient to establish a contract for sale of goods in some cases.
Contract Month
The month in which delivery is to be made in accordance with a futures contract.
Covered Call
Selling a call against your crop in an amount not to exceed your ownership of physical inventory.
Default
The failure to perform on a futures contract as required by exchange rules, such as a failure to meet a margin call or to make or take delivery.
Deferred Payment
A payment term in which the buyer and seller agree to defer payment. (Note: Deferred payment is not the same as Delayed Price.)
Delayed Price (Also known as Deferred Price, No Price Established - 'NPE')
An unpriced grain trade in which title passes upon delivery, but neither the basis nor a futures price is set. The seller has the right to price later, at the price in a specified local market at that time, less service charges (if any). (Usually used as a substitute for storage.)
Demurrage
Penalty charged when freight cars or trucks are held for loading, unloading, or shipping instructions beyond the allowable time.
Derivatives
Any financial instrument whose value is derived from, or based on, the value of another asset, instrument, or commodity. (E.g., corn futures are actually a derivative; their value is based on the value of cash corn in Chicago. "Swaps" are also derivatives.)
Disappearance
Domestic use and export of a commodity, often used interchangeably with distribution, although the meanings are not identical.
Exercise
To invoke the rights of a long option position to take a futures position.
Exercise Price
The price level of the futures contract that will result if an option is exercised.
Exercise Value
The amount of immediate potential gain if an option owner exercises an option into a futures position at the option's strike price. (E.g., "I own a Dec 2.60 call, and Dec futures closed today at $2.83. That call has 23 cents of exercise value, but the total option premium is 28 cents.")
Expiration Date
Generally the last date on which an option may be exercised. It is not uncommon for an option to expire on a specified date during the month prior to the delivery month for the underlying futures contract.
Extrinsic Value (Also Known As "Time Value")
That part of any option premium that is not exercise value. (E.g., "The Dec $2.80 call closed today at 18 cents; 12 cents was exercise value, so its extrinsic value is 6 cents/bu.")
First Notice Day
The first day on which notice of intent to deliver a commodity in fulfillment of an expiring futures contract can be given to the clearinghouse by a seller and assigned by the clearinghouse to a buyer. Varies from contract to contract.
F.O.B.
Free on Board. The expression indicates that the seller assumes all responsibilities and costs up to the specific point or stage of delivery named, including transportation, packing, insuring, etc.
Forward Contract
A cash grain contract calling for shipment in the future. Used often to refer to purchases from farmers. Some farmers make it a practice to forward contract a portion of their production at planting time.
Full Carry (Delivery Markets)
A futures market where the price difference between delivery months reflects the total costs of interest, insurance, and storage. The amount by which a deferred futures month must trade over a nearby month to make it economically feasible to take delivery via the nearby contract, hold the grain, and deliver against the deferred. (E.g., "If storage in Chicago is 4.5 cents per month and interest costs 3 cents per month, full carry between the December and March corn futures is around 22½ cents.")
Futures Contract
An agreement to purchase or sell a commodity for delivery in the future: (1) at a price that is determined at initiation of the contract; (2) which obligates each party to the contract to fulfill the contract at the specified price; (3) which is used to assume or shift price risk; and (4) which may be satisfied by delivery or offset.
Futures Only
Cash market forward contracts whereby the futures price level is fixed, but the basis is not. See also "Hedge to Arrive."
Hedge
A transaction intended to reduce risk. Often refers to taking a futures position that is equal and opposite from one's position in the cash market.
Hedge(D) To Arrive
Cash market forward contracts in which the futures price has been fixed in the contract, but not the basis. Therefore the final cash price is not fixed until a later point in time. See also "Futures Only."
In The Money
An option with exercise value (e.g., a call at $2.00 us "in the money" $.50 if the futures market is trading at $2.50).
Intrinsic Value
The amount by which an option is in the money.
Inverse
A market in which nearby values are higher than deferred ones. Can refer to basis, futures, freight, and futures spreads. Also "inverted."
Lien
A security interest used to secure a debt. In grain, a bank may take a lien on a growing crop (thus, a crop lien) to secure a loan to the grower.
Last Trading Day
The last day on which trading may occur in a given futures or option.
Leverage
The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.
Long
One who has bought futures contracts or owns a cash commodity.
Long Hedge
Buying futures contracts to protect against possible increasing prices of commodities.
Margins (Futures)
An amount of money deposited by both buyers and sellers of futures contracts and by sellers of options contracts to ensure performance on the terms of the contract. In futures trading, there are two kinds of margins: initial margin and variation (maintenance) margin. Initial margin is the "good faith" margin deposited when a trade is made, and variation margin reflects the day to day changes in price.
Margin Call
A call from a clearinghouse to a clearing member, or from a broker or firm to a customer, to bring margin deposits up to a required minimum level.
Metric Ton
Equal to 2204.6 pounds.
Minimum Price (Contract) - (Also MPC's)
A cash grain contract in which the buyer agrees to set a price floor but no ceiling. The buyer uses options to offset the risk. MPC's are popular as a way for farmers to sell cash grain, yet retain a chance for higher prices.
Nearby Delivery Month
The futures contract month closest to expiration.
No Price Established (NPE)
A contract between producer and warehouse which transfers title to the warehouse, with a sales price to be established later. The seller relinquishes ownership of the grain, and becomes a general creditor of the warehouse until paid.
Offset
Taking a second futures position opposite to the initial or opening position, "close out". Approximately 99 percent of all market participants will close their futures positions by offsetting them rather than actually taking or making delivery of the underlying commodity.
Open (The)
The period at the beginning of the trading session officially designated by the exchange during which all transactions are considered made "at the open".
Open Interest
The sum of all long or short futures contracts in one delivery month or one market that has been entered into and not yet liquidated by an offsetting transaction or fulfilled by delivery.
Open Outcry
A method of public auction for making bids and offers in the trading pits of commodity exchanges.
Opening Range
The range of prices at which buy and sell transactions took place during the opening of the market.
Options
Contracts that give the buyer the right, but not the obligation, to (1) buy a commodity or futures contract, or (2) sell a commodity or futures contract. The right to buy a commodity is a CALL; the right to sell a commodity is a PUT. Options are traded based on some predetermined price (strike price), for a fixed period of time. Still used by some to incorrectly refer to the futures contract itself.
Option Premium
The "price" a buyer pays for an option. Premiums are arrived at through open competition between buyers and sellers on the trading floor of the exchange.
Out Of Contract
A buyer or seller who has not fulfilled contractual obligations. A shipment that does not meet the contract specification.
Out Of Money
An option whose strike price is away from the current market price and that has no exercise value (e.g., an option to sell at $2.20 is "out of the money" if the market is at $2.34).
Overbought
A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors.
Oversold
A technical opinion that the market price has declined too steeply and too fast in relation to underlying fundamental factors.
Position
A market commitment, either long or short, in the market.
Position Report
A report for management, the purpose of which is to provide information on the company's exposure to price and basis risks.
Positive (Basis)
A basis that is greater than zero (e.g., the local soybean processor is bidding $6.10, and futures closed at $6.05, the basis is +5).
Premium (Options)
The price or cost of an option.
Price Risk
Risk associated with possible changes in prices, usually futures prices as opposed to basis risk.
Protein Premium
Indicates the extra price obtainable due to higher protein content than originally contracted. For example, a contract price could be based on 11½ % protein wheat with a premium of 2 cents per bushel for each ¼ percent protein above the 11.5 base.
Put
An option giving the buyer the right to sell futures at a specified price (strike price) for a specified time.
Roll
To move a cash grain or futures position into a different (usually more deferred) time slot by simultaneously buying one futures month and selling another.
Round Turn
A completed futures transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase.
Sell Out
An actual sale of grain of like kind and quantity on the open market, or to establish a fair market value on unshipped grain. Used to determine market value and assess damages due to a buyer's failure to perform on a contract. A trade made by a seller for the account of a buyer who has failed to provide billing on a shipment. (Reference NGFA Grain Trade Rule 13.)
Settlement Price
The daily price at which the clearinghouse settles all accounts between clearing members for each contract month. Settlement prices are used to determine both margin calls and invoice prices for deliveries. The term also refers to a price established by the clearing organization to calculate account values and determine margins for those positions still held and not yet liquidated.
Short
One who has sold futures contracts or the cash commodity.
Short Hedge
Selling futures contracts to protect against possible declining prices of commodities.
Speculator
A market participant who has absolutely no interest in owning or selling a physical commodity, but makes money taking on risk - buying and selling futures contracts in hopes of making a profit.
Spot
Usually refers to a cash market price for a physical commodity that is available for immediate delivery.
Spread
The difference between two futures prices. Spreads may be intercommodity (e.g., corn vs. wheat) or time-related (e.g., March vs. May corn). When used as a verb, "to spread" means to buy one futures month and simultaneously sell another.
Stop Order
An order that becomes a market order when the commodity reaches a particular price level. A sell stop is placed below the market, a buy stop is place above the market.
Strike Price
The exercise price of an option. The price at which the rights of an option can be exercised into a futures contract. (E.g., a Dec $2.40 call has a $2.40 strike price. You can buy futures at $2.40 if you want to exercise the call.)
Target Price (Firm Offer)
A type of cash contract in which the seller agrees to sell grain (and the buyer agrees to buy grain) at a specified price that is higher than the current price. Also refers to the desired selling price. Often called a "firm offer" when it involves a producer selling to a country elevator. No commitment to deliver exists unless the target price is reached. No correlation to now-obsolete USDA term "TARGET PRICE."
Tender
As a verb, tender announces the intention of delivering a notice or an actual commodity. As a noun, tender normally denotes a notice of an intent to buy. The tender usually spells out in detail quantities to be purchased, desired quality, time of shipment, country of origin, and all inspection, weighing, and payment terms. Overseas buyers usually issue tenders to ensure the maximum competition for a given piece of business.
Texas Hedge
Being long or short futures in an amount more than you physically own.
Time Decay
The decline in the "time value" portion of any option's premium over time. This assumes the underlying futures price (and market volatility) remains constant. Time decay is greatest in the latter stages of an option's life, gaining momentum especially in the final weeks before expiration.
Time Value
(Also known as "extrinsic" value.) That part of any option premium that is not immediate exercise value. (E.g., "Dec futures closed today at $2.92. The Dec $2.80 call closed at 18 cents; 12 cents was exercise value, so its time value is 6 cents/bu.")
Trade Options
Cash market options on the physical commodity, as opposed to exchange-traded options on futures. Trade options are currently banned in agricultural commodities (as of April 1996) under federal law, but are legal in certain other commodities.
Underlying Futures Contract
The specific futures contract that may be bought or sold by the exercise of an option.
Volatility
G. In options trading, refers to a specific meaenerally, the degree of price change in a marketsurement of past (historic volatility) or future (implied volatility) price movement.
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Grain Contracts

The following is a graphic representation of how and when certain types of contracts are used in your marketing program.  It is an excellent tool to help you learn how to manage risk in given market circumstances.

Graphic representation of how and when certain types of contracts are used in grain marketing. Store and Wait Delayed Price Contract Minimum Price Contract Basis Contract Sell Cash / Buy Futures, Buy / Call Option Minimum Price Contract Hedge Non-Roll Hedge to Arrive Buy/Put Option Cash Sale Now Contract Forward Contract

Cash Contract (Fixed Price Contract)

FUTURES + BASIS - (FREIGHT & MARGIN) = CASH

This is the most common contract used by Montana elevators. The producer calls the local elevator and is quoted a cash price for a particular commodity for a nearby delivery period. If he sells his grain on a cash contract, he has locked in both the futures price and the basis, effectively transferring all price risk to the buyer. Shipment is usually "buyer's call" (whenever the elevator can take the grain) during the contract delivery period and full payment is made upon delivery.

Advantages

Disadvantages

Forward Contract (Cash Forward Contract, Forward-to-Arrive Contract)

FUTURES + BASIS - (FREIGHT & MARGIN) = CASH

A forward contract is a cash contract that allows a producer to sell grain for future delivery. Although both futures and basis are set, premium and discount scales may or may not be able to be set until delivery. An example of this contract would be selling new crop grain many months before harvest if market conditions lead you to believe that prices will be lower at that time.

Advantages

Disadvantages

Basis Contract (Basis Fix Contract)

FUTURES + BASIS - (FREIGHT & MARGIN) = CASH

In this type of contract, the producer locks in a favorable basis with the elevator, leaving the futures price to be set later. Basis contracts are used successfully when the basis is at historically high levels and market conditions lead you to believe that there is room for improvement in futures prices. It is important to ask your elevator manager for basis levels for more than the nearby futures month and to determine if storage costs warrant fixing the basis farther out. The delivery date and quantity will be negotiated with the elevator. Discounts and premiums are usually set at the time the basis is established, unless the sale is for new crop delivery. A basis contract allows the producer to collect a 70-75% advance on their final estimated payment upon delivery of the grain.

If the deadline comes when you must lock in the futures price, but you want to leave the option open and allow for further possible futures price increase, you may roll the basis contract into a deferred futures month. If the deferred futures market has a carry built into it (the deferred price is higher than the nearby price) your basis contract will be reduced by the amount of that carry. If the deferred futures market is in an inverse (the deferred price is lower than the nearby month), the amount of the inverse will be added to your basis contract.

Advantages

Disadvantages

Minimum Price Contract (Option Contract)

FUTURES + BASIS - (FREIGHT & MARGIN) = CASH

Minimum price contracts are commonly used among producers as they are very simple to execute and have the least risk involved. The seller locks in his cash price, buys a call option to replace the amount of the sale, and delivers his grain. This strategy can be executed through your elevator or through a broker. The seller establishes the minimum price by subtracting the cost of the option from the cash sale price. He can choose to sell his option at any time before expiration, as long as it has value. Any premium that he collects from his option is then added to the original minimum price to arrive at the final selling price. Although a minimum price contract does not improve the final cash price in every case (option may expire worthless), the strategy reduces risk by eliminating the downside exposure. The advantage to a minimum price contract is that once the seller locks in his cash price, he is no longer exposed to adverse market movement. If the futures market moves higher after the cash sale, he can still participate in that move through the call option. The increase in the value of the call will be added to his net selling price once he sells the call. The disadvantage of a minimum price contract is that the seller can no longer take advantage of an increase in the basis since he has locked in the cash price, and the call only reacts to futures price movements. Also, time decay will erode the call's value as it approaches its expiration date, which will partially offset increases in value due to rallies in the futures.

Advantages

Disadvantages

Hedge To Arrive (Futures Fixed Contract)

FUTURES + BASIS - (FREIGHT & MARGIN) = CASH

A hedge-to-arrive contract allows the producer to lock in a futures price with the elevator, leaving the basis to be set at a later time. The elevator will establish a hedge in the futures on your behalf in exchange for delivery of the cash commodity at a set time. This contract is useful if futures prices are relatively high and market conditions lead you to believe that they will weaken and/or you think that there is room for improvement in basis levels. A hedge-to-arrive contract will be written for delivery of a specific amount of grain (usually 5,000 bu lots, but some elevators may write one for a smaller amount), a specific shipment period, and the set futures price. This contract will be complete when the producer sets the basis, which will determine the cash price. The basis can be set at any time but must be set prior to delivery and while the contracted futures month is still being used by traders to calculate cash price.(usually the 15th day of the month preceding contract expiration)

Advantages

Disadvantages

Delayed Price Contract (No Price Established, NPE, or Deferred Price Contract)

FUTURES + BASIS - (FREIGHT & MARGIN) = CASH

For this type of contract, the seller delivers and transfers ownership of his grain to an elevator without setting a sales price. No futures or basis are established until the contract is priced. You will want to discuss with your elevator manager if a service charge will be applied to this contract and if there is a time period that the grain must remain unpriced or a time limit on fixing a final price. It is also important to clarify if discounts and protein scales will be locked in at delivery or time of pricing.

Advantages

Disadvantages

The Grain Contract information presented is copyright ©2000 Montana Grain Growers Association. Used with the express permission of the Montana Grain Growers Association.

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