Forward Contracts and Futures Markets

With historically high grain prices during the last couple of years, one would think that grain producers and grain elevators that accumulate large amounts of product to sell on future’s markets would have been able to reap huge benefits. In this week’s From The Ground Up, Joe Brown says marketing grain isn’t as simple as you might think.

"With the record prices we saw in wheat and corn, a couple of year ago, many elevators were unable to offer a cash forward contract."

Mark Welch is a Texas Agrilife Extension economist.

"When a farmer writes a forward contract, the elevator turns around and they sell a contract on the future’s exchange. Now they are in a marginable position, and if that contract goes against them, if they have a loss, you have to deposit funds in that account to accommodate that loss on a daily basis."

The capital necessary in a volatile price environment caused grain marketers to stop offering forward contracts, although farmers can sell their crops directly on the future’s market.

"With the problem being that if that position moves against you, for instance I sell today and the market goes up, I have to place in my margin account the amount of funds that compensate for the difference between the price I sold, and the price that is currently trading."

And again the capital requirements are too great for most producers, especially when you consider today’s input costs.

"We consider what’s happening to land values, to fuel costs, to fertilizer costs, the technology fees that are associated with these tremendous yields that we’re seeing in crops today. And that’s a particular burden in a high risk production area like this part of Texas, in that you’re not guaranteed a certain level of production at the end of that growing season."

Welch was quick to hold up last year as an example.

"Crops looked good through most of the growing season, but then as we got toward the end it got hot, it got dry, and we lost a tremendous amount of yield potential, right after the farmers had virtually spent every penny they could aside from their harvest cost, investing in that crop."

The hope is that if grain prices stabilize, forward contracts will again be able to be used as a marketing tool. I’m Joe Brown, looking at Brazos Valley agriculture, From The Ground Up.

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