It's September 2006. Chicago Board of Trade (CBOT) corn futures starts moving up, something uncommon at harvest. They push $3/bu. for '07, '08 and even '09. So a grower contracts with his local elevator and figures a 30¢-under basis. Can't go wrong with $2.70.
Fast-forward six to eight months. The grower and others are flabbergasted by corn topping $4 cash. But he's booked at $1.30 lower. Does he deliver at the contract price or look for any possible escape clause?
That's undoubtedly a scenario nearly every producer has heard of, or for some, even lives right now. Think of it, if you sell 1,000 acres of 150 bu./acre corn at $1.30 under the market price, that's a little under $200,000 lost because of that contract. Where are the Rolaids?
Gerald Scheckel, Richmond, KS, faced a similar situation in recent years. He's bitten the bullet. He's taken the agreed-upon price, while a new regional ethanol plant and competing entities have paid more at the current market price.
“I was raised that if you sign your name, you were happy with the price when you sold your grain in the beginning,” he says.
“You deliver what you market. If you contract corn at $2.50/bu. and the market is at $3, take the $2.50 and try to get more the next year,” he says.
There are still marketing horror stories from 1995-1996. That's when drought-caused $5 corn led some growers to recklessly misuse some hedge-to-arrive (HTA) and other rollover contracts. There were margins that couldn't be covered. Money and bushels were owed that couldn't be delivered.
Bad marketing yielded bitter feelings among growers and their grain handlers, some of whom did their share of bungled contracting themselves. Lenders also hollered. So did state and federal prosecutors.
A decade later, $5 appears possible again. The doom of yesteryear caused much more scrutiny in marketing plans. But still, more non-deliveries are expected on contracts.
“There are still situations that are not totally resolved from the mid-'90s,” says Diana Klemme, market analyst with Grain Services Corp., Atlanta, GA, which handles marketing and other services to grain elevators nationwide.
“And there are problems surfacing now with farmers who have already contacted lawyers; already announced their plans not to deliver on low-price contracts,” Klemme says. “It's for any number of reasons. Maybe one where the farmer didn't sign the contract, or where the farmer says his son signed the contract and didn't have authority to do so.
“It inevitably boils down to the fact that the price on the contract is way below the current market value,” she says.
Darrel Good, Extension grain marketing specialist, University of Illinois, says that for last year's crop, some were disappointed that they priced too early. “I haven't heard of any action to get out of any of those contracts,” he says. “I see it as less of a problem for 2007, but who knows when we go forward and see how high prices can go.”
Scheckel says that his '06 marketing program involved some corn contracted up to $4.13/bu. to the regional ethanol plant. “They need a steady flow of corn,” he says.
But with the lack of a crystal ball, he contracted much of his '06 corn early last year for $2.45-2.53 — a good enough price to get his name on the dotted line.
Continue Reading on Next Page >
“I always work with my marketing service to determine a break-even price for my crops, then put together a marketing plan,” says Scheckel. “Those early prices looked good at the time and I honored them.”
He notes that the ethanol plant works with growers who cannot deliver the corn due to weather-hampered production. “In some cases they'll charge a small fee, about 10¢/bu., and let you roll your contracts over to the next year.” he says. “That's something you look for in a contract.”
Gail Ortegren, grain manager for Cooperative Producers, Inc., Hastings, NE, says growers are already contracting to deliver corn as far out as 2010. “I've never seen it that far out before,” he says. Ortegren and his associates in the central Nebraska co-op are making sure contracts are signed, sealed and delivered.
“The biggest thing on all contracts, no matter what kind, is to make sure growers understand all of the terms and ‘what ifs’ of the contract,” he says.
“Some of the exotic contracts are more complicated. Simpler contracts, whether they are ‘futures’ only or normal cash contracts, are pretty straightforward,” Ortegren says. “But growers still have to know all of the terms of the contracts and fill out all required papers.”
Elevators have done a better job to make contracts more enforceable, he says, “and growers have obviously become more educated or they wouldn't be looking for these types of exotic contracts.”
Good encourages growers to “pay close attention to the provisions of the contract that would speak to what conditions they can buy-out and at what cost.
“For the most part, we've always viewed these as a hard contract; date, quantity and price all locked in. But look for any other conditions that would affect the obligation to deliver, whether it's a specific provision that links to what happens with a crop failure or other situation,” Good says.
Klemme says honoring a contract “goes back to the credibility and ethics of the industry. Some areas may consider the farmer a merchant, where he is obliged to perform on an oral agreement, which may even hold up in court,” she says.
“But you don't want to have to go to court. If you're a grower, honor your agreements and sign your contracts. Get contracts signed if you are the elevator manager. And make sure they are kept in a fireproof safe,” Klemme says.
“Whether you're the farmer or the elevator operator, you should accept that in this time of high prices, not all things will turn out the way you want,” she says.