By Brooks York, AVP of Producer Services
Forward grain contracts can be an effective risk management tool, but they can also create challenges when production doesn't go as planned.
In the latest episode of Straight to the Point, our risk management experts discuss a common situation that can catch producers off guard: deciding what to do when weather impacts yield potential and contracted bushels may no longer be available to deliver.
In these situations, a producer's marketing decisions and crop insurance coverage become closely connected. Understanding how they work together can help agents guide clients through difficult decisions and avoid unintended financial consequences.
What is forward grain contracting?
A forward grain contract is an agreement a farmer enters to deliver a specific number of bushels to a grain buyer at a price agreed upon before harvest.
These contracts help producers lock in prices, but they also create an obligation to deliver the contracted bushels.
An example scenario
In May, Farmer Johnson contracted 5,000 bushels of corn with his local grain elevator at $5 per bushel.
By August, severe drought had significantly reduced his crop prospects. Concerned that he might not produce enough corn to fulfill the contract, Johnson called the grain elevator and canceled a portion of the contract.
Since corn prices had increased since May, Johnson had to buy back those bushels at the higher market price.
The problem
At first glance, canceling the contract may seem like the safest option.
The problem is that crop insurance has not yet established the harvest price. That price is determined during the October harvest price discovery period.
By canceling in August, Johnson may be required to pay the elevator the difference between the original contract price and the current market price, but he cannot yet use a crop insurance indemnity to help offset that expense.
Why this matters
Before encouraging a producer to cancel a forward grain contract, make sure they understand the timing implications. If a producer cancels too early, they could end up paying more out of pocket than necessary.
In many situations, waiting until the harvest price is established may provide a clearer picture of both production losses and potential crop insurance indemnities. In our example, if Farmer Johnson waits until the harvest price is determined, any eligible crop insurance indemnity may help offset the additional cost associated with being unable to deliver his contracted bushels.
If he cancels too early, he may owe money to the grain buyer before crop insurance can provide that support.
AgriSompo is here to help
Still have questions? Your AgriSompo business development representative can provide more information and help you prepare for producer conversations.
For more information about how crop insurance interacts with grain marketing and forward contracting, be sure to watch the latest episode of Straight to the Point: