Most simple elevator contracting programs operate similarly to the Minimum Price Contract (MPC). Lehman says the Farmers Cooperative MPC enables a farmer to set floor price, but permits participation in a rally through a call option. The delivery period, quantity and minimum price are established in the contract. The minimum price is simply determined by taking the cash or forward contract price and subtracting the premium and service charge. The title to the grain passes to the buyer upon delivery.

As an example, a grower wants a floor price, but also the opportunity to capitalize on price increases should planting problems or a drought scare occur. He could set MPC floor, based on CBOT December 2014 corn futures at, say, $4.50 and a 20-cents-under basis, putting the MPC at $4.30, or the current local bid.

sample corn minimum price contract

In addition, he would buy a December call with about a $5.50 strike price for a cost of about 12 cents per bushel (based on late December 2013 options premiums). The MPC is then about $4.15 ($4.30 minus the 12-cent options premium and about a 3 cents elevator service charge. (Remember, these are price examples and will vary depending on current price ranges.)

There is a floor price of about $4.15. But the farmer can also benefit from price rallies.