FARMERS' CORNER
	"To Help The Producer Sell Better"			March 1997 1997 Number 3

Wouldn't it be nice. . . - Simplicity - Flexibility - Security - Opportunity

Every one of us would like to lead a life characterized by the four traits listed above. Imagine a life of simplicity, where nothing was too complicated to figure out. Imagine having flexibility--the power to control situations and make them fit your needs. How about security? We could all use a little more of that. Wouldn't it be great if we had the power to know exactly where we stand at all times? Last but not least, we all want opportunity--the chance to improve, to reach for something a little better. In the real world, however, most of us don't have these qualities in every area of our lives. Wouldn't it be great, then, if you could have them in at least one area?

How about farm marketing? Marketing your crops can be an emotionally exhausting experience unless you have a plan and stick to it. A Minimum Price Contract can help take the uncertainty out of marketing and replace it with simplicity, flexibility, security, and opportunity. Here's a closer look at each of these traits and how Minimum Price can provide each one.

Simplicity-

Complicated contracts often contain hidden risks that go unnoticed because they are hidden by jargon or complex wording. Minimum Price has no confusing "fine print." There are only two parts to the contract; we call them the "floor" and the "more".

The "Floor" -- You decide to sell your grain at the elevator's current posted board price. This becomes your minimum price. That means that no matter what happens now, you will never receive any less than that price.

The "More" -- This is the part of Minimum Price that separates it from a simple cash contract. For a fee (paid when the contract is signed), you can tie yourself to the futures month of your choosing. You have the opportunity to receive any increase in the price of that futures month between the time you sign the contract and when the contract expires.

Example: You sell 10,000 bushels of new crop soybeans at $6.75. You decide to tie yourself to November futures with a Minimum Price Contract. At the time you sign the contract, November futures are trading at $7.05. A few months later, November futures are trading at $7.55--an increase of fifty cents. You call the elevator and price the contract, and receive an extra 50¢ above and beyond your contracted price of $6.75. Your final selling price would be $7.25.

There is another aspect to the "more". Many producers are fearful of forward contracting because of the possibility of being unable to deliver if something should happen to the crop. Minimum Price allows total forgiveness in the event of crop failure, for a nominal pre-set fee.

Note: once the contract has been priced to receive an increase, it becomes a standard Forward Contract and the non-production clause no longer applies.

With Minimum Price, there are no surprises or difficult concepts to learn. At the time the contract is set up, you know:

• How much the contract will cost
• When the contract expires
• Your minimum price
• When the grain must be delivered
• When you will be paid
• The nominal penalty for undelivered bushels (if Minimum Price is done in conjunction with a forward contract)

Flexibility -

Minimum Price gives you flexibility by allowing you to fit it specifically to your needs. It provides flexibility in two areas.

1. How long do you want to stay in the market? You can tie your Minimum Price Contract to any futures month you want (the longer you want to stay in the market, the higher the cost).
2. How much of your yield do you want to Minimum Price? You can use Minimum Price on any portion of the bushels you sell. For example, you could sell 10,000 bushels on a cash contract, and buy Minimum Price protection on 5,000 of those bushels. This is a good way to lower the cost of Minimum Price while still allowing yourself the opportunity that it provides.

Security -

In the unpredictable, volatile world of grain prices, Minimum Price offers some much-needed stability and security. No one has a crystal ball that will tell them exactly what prices will do from one day to the next. Trying to market crops without some kind of plan in place is like walking through mountains in a thick fog. There is really no way of telling whether the next step will be onto solid ground or off the edge of a cliff. Using a Minimum Price Contract is like building a bridge that will keep you from falling off cliffs. No matter what the market does after you sign the contract, you are completely free of downside risk--and you can receive more if the market goes up!

The second form of security Minimum Price offers is the ability to "walk away" from the contract if you are unable to deliver the bushels at harvest. Even though forward contracting may result in better prices, many producers are fearful of forward contracting because of the potentially expensive consequences should something happen to the crop and they be unable to deliver. Minimum Price offers total forgiveness in the event of non-production. A nominal fee (usually only 1 or 2 cents/bu.) is specified at the time the contract is signed. If for any reason the producer is unable to deliver some or all the bushels contracted, this small fee is his only obligation.

Opportunity -

Before harvest, and sometimes before a crop is even planted, all kinds of things can cause high prices. Weather patterns, foreign markets, grain stocks, and many other things that cause insecurities about supply or the coming crop will cause prices to rally. As harvest approaches, if it becomes apparent that the crop is going to be all right, prices stabilize and start to lower as grain is flooded into the local market.

There are two ways to take advantage of the opportunities that summertime rallies provide. You can sell the grain before harvest on a Minimum Price Contract, or you can put the grain in storage at harvest and wait for better prices. Minimum Price is the better alternative, because it gives you all the opportunity of receiving a higher price with none of the risk of a lower price if the market goes down. If we could have simplicity, flexibility, security, and opportunity in every part of our lives, life would be very good indeed. Since it is unlikely that we will enjoy them in every part of our lives, isn't it that much more important to strive for these four things in the parts that we do have some control over?

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Minimum Price Basic Training

We've talked a lot about the theory of Minimum Price; now let's get down to the basics. Just how does it work? It's really quite simple. First, you just sell your grain, just like you would on a standard cash contract. The price you sell for becomes your Minimum Price. You are guaranteed to receive that price no matter what.

Next, you decide how long you want to stay in the market. In this example, the producer has decided that he wants to sell now and stay in the market until mid-October. He is then "hooked" to the futures month nearest to that time (in this case November). This is called the Base Futures Month. The producer is eligible to receive any increase in the price of the base futures month between when the contract is signed and when it expires. In the example, November futures are trading at $7.05 when the contract is signed. If November futures rally to $7.80 and the producer "prices" the contract (calls the elevator and tells them that he wants to receive the increase), then he receives an additional 75¢ when the grain is delivered, making his final selling price $7.50 ($6.75 + 75¢) The producer has the option to specify a certain increase at which to automatically price the contract. In the example, he has chosen to have the contract automatically priced if November futures increase by $1.00.

Note: Once a Minimum Price Contract has been priced so the producer can receive an increase, it becomes a Forward Contract and can no longer be used as protection against non-delivery

MINIMUM PRICE WORKSHEET Date____3-2-95_____ Crop___Soybeans___ Minimum Price $6.75 Base Futures Month ( NOV ) & Price __7.05_____ Desired Increase ____$1.00________ Target Price ____$8.05_________ Expiration Date ___10-15-97____ Payment Date____upon del.____ Cost: ___11,250____bushels X __.45___= $____5,602.50___. This amount is due and payable on the date contract is written. SUMMARY: Customer receives a minimum price of __6.75__ per bushel and can participate in any increase in the ___NOV___ base futures month over ___7.05___ (base futures price). If the base futures are tradeable at the target price of _8.00__ this contract will automatically be priced. ____$6.75____ + ___1.00___ = ___$7.75___ Minimum Price Futures Increase Final Price The above bushels must be delivered by __Oct 20__ except in the case of crop failure. A non-delivery cost of __2_¢ per bushel will be charged for any bushels not delivered.

This is only an example. Please call for current costs & prices.

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When To Use Minimum Price

Before Harvest

If you want to sell before harvest but are afraid of missing out on higher prices or not being able to deliver the crop, Minimum Price can eliminate your fears and give you the security and flexibility you need to take advantage of profitable selling opportunities.

For those who object to selling ahead of harvest because of the fear of non-production, the Minimum Price 50/50 plan (Sell 50% on a standard Forward Contract, and 50% on a Minimum Price Contract) is an especially good alternative. You can lock in a profitable price on 100% of your expected production, and receive total forgiveness for up to half of the bushels you contracted.

At Harvest or After

Many producers who have not contracted their crops by harvest look at storage as a way to stay in the market in the hopes of receiving a better price than what is available at harvest. The problem with storage is twofold; 1) there is no protection should the price go down, and 2) storage costs and interest may eat up any increase in price.

Minimum Price offers the same opportunities as storage, and usually at a price that is comparable to storage or lower. Plus, you get these added (and very important) benefits:

1. No danger should prices go lower,

2. You get your money at harvest.

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Without a Net....

We have always held a great deal of admiration for those brave men and women who risk their lives on tightrope and the trapeze under the big top for our enjoyment. We all hold our breaths when the tightrope walker stumbles, when the trapeze artist lets go of his bar and trusts his partner to catch him and keep him from falling. Often, we are reassured by the sight of the net far below that awaits to save them should they fall.

By far the most exciting, though, are the brave souls that perform without a net. They have only their training and concentration between them and almost certain death. We all admire these daring feats of strength and courage, but very few of us would think of becoming a trapeze artist or tightrope walker, especially without a net.

It is true that most of us would not expose our lives to such precarious and dangerous positions. Isn't it odd, though, that many of us think nothing of exposing our livelihood to exactly the same danger? Grain prices are nothing if not unpredictable; we never know if the next "step" will be onto level ground, a leap upward, or a disastrous fall.

As the picture at right illustrates, a Minimum Price Contract is a great way to open yourself up to higher price opportunities while completely eliminating any downside risk. If we wouldn't dream of walking a tightrope without some protection from falling, does it make sense to try to make our living without protection from a "fall"?

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