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Extended Price Contract
An Extended Price Contract contract is like a minimum price contract but is also like buying futures. With an Extended Price Contract, you would sell grain and receive 80% of the money up front and still have the option, if prices rally, to receive a futures gain above your set futures price. This contract will eliminate storage costs and storage risks. A LDP, if applicable, would have to be collected before signing this contract because you would lose beneficial interests. The remaining 20% of your money is kept back and is considered risk capital and if futures continue to fall, you will be stopped out when the 20% is used up unless you make arrangements to pay in more risk capital. You will need to keep abreast of the markets and sell your grain a second time. Here is an example of how this type of contract works :March futures are trading at 5.34 Cash beans are at 4.88 The LDP is 8 cents. You decide to do an Extended Price Contract. You would collect your 8 cent LDP, sell the beans at 4.88. Dunkerton Co-op would pay you 80% of the 4.88 or 3.90 a bushel. You would be then be "long" the March futures at 5.34. Now say March futures rally to 5.60 and you decided to price your beans. You would receive the difference of 26 cents plus the 98 cent risk capital that was kept back. Your final price would be 3.90 + .26 + .98 = 5.14 + .08 LDP = 5.22 March futures would have to go down 98 cents before you would lose your Risk Capital and be stopped out of the market. Say March futures continue to decline and at $5.06 you decide to get out. Your final price would be 3.90 + (.98 - .28) = 4.60 + .08 LDP = 4.68. While not the best price, this is easily what your net would be after having paid storage to the 1st of March.
An Extended Price Contract can be wrote in 1000 bushel increments or 5000 bushel increments. Cost to write this type of contract is $100 per contract. While I would not recommend doing a 100% of your grain production with this type of contract, it is an option to take a look at.
Commodity trading is risky and Dunkerton Co-op assumes no liability for the use of the information contained above. Past financial results are not necessarily indicative of future performance. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed to its accuracy. Any examples given are strictly hypothetical and no representation is being made that any person will or is likely to achieve profits or losses similar to those examples. Neither the information, nor any opinion expressed, constitutes a solicitation to buy or sell futures or options on futures contracts. |
