Contract Types
CHS SunPrairie offers several different contracting options. Click on the links below to learn more about each contract type and how they work to see which is the best for you and your operation. Please call any of the CHS SunPrairie merchandisers if you have any questions.
- Cash Contracts
- Hedge-to-Arrive (HTA) Contracts
- Basis Contracts
- Minimum Price Contracts
- Delayed Price (DP) Contracts
- Act of God (AOG) Contracts
Cash Contracts
These contracts allow the grower to lock in the full price for their grain today for either immediate or deferred delivery.
How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period. Grower is paid CHS SunPrairie’s board price for their grain on the day it is sold.
Cash Contract Advantages:
- Allows grower to lock in today’s price for their grain
- If a grower likes next month’s price better they can lock that in and deliver later
- Once the price is locked in there is no need to worry about fluctuations in price, the grain is sold
- Grower knows what they will get paid when their grain is brought in (plus/minus any premiums or discounts)
Cash Contract Disadvantages:
- Costlier to buy out of, relative to a few other contract types, if unable to deliver grain
- Cash prices are not always available in later delivery periods
- Grower is unable to capture any potential gains in futures or basis prices
Hedge-to-Arrive (HTA) Contracts
These contracts allow the grower to lock in a futures price, for futures traded commodities, and price their basis at a later date.
How does it work?
Grower agrees to deliver a certain quantity and quality of grain during a set time period. The producer chooses the futures price level and the basis remains open and un-priced until it is set; on or by the date specified on the grower’s contract with CHS SunPrairie.
HTA Contract Advantages:
- Lock in the riskiest part of contract price, the futures, while leaving the basis open in hopes for it to improve
- Enables grower to lock in current futures price for grain at a later delivery date where cash bids may not yet be available
- Easier/cheaper to buy out of if the crop does not get planted or if production is lower than anticipated
HTA Contract Disadvantages:
- Grower is unable to take advantage of higher futures prices once the price is set
- Contract does not offer protection in the event that basis levels drop or remain unchanged
Basis Contracts
These contracts allow the grower to lock in their basis on their contracts but lock in futures at a later date.
How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period. The basis is locked in on the contract at this time. The final price of the contract is determined at a future date, as indicated on the grower’s contract with CHS SunPrairie, by locking in the futures price and adding/subtracting the basis value on the grower’s contract.
Basis Contract Advantages:
- Allows producer to sell their grain while locking in part of the price, waiting for higher futures levels to lock in the last portion of the price on the contract
Basis Contract Disadvantages:
- Futures prices are not guaranteed to rise and could instead fall, meaning that the grower is locking in a futures price that is lower than the futures price of the day the basis was locked in
Minimum Price Contracts
These contracts establish a floor price for grain through the purchase of a call option, which gives growers the flexibility to capture potential futures market increases.
How does it work?
Grower agrees to deliver a specific quantity and quality of grain for a determined delivery period. The contract sets a minimum cash price by locking in a current market price – less the cost of a designated call option. Call options give the buyer the right, but not the obligation, to own futures at a given strike price level. Call options gain value as the market goes higher, which allows the grower to gain value on the contract as the market works higher above the designated strike price.
Example:
Assume that on May 1st the cash price for October delivery soybeans is $12.00/bushel ($12.50 futures and a -50 cent basis). The grower, Bob, wants to lock in that price for part of his crop, but feels that futures have the potential to trade higher due to drought concerns and does not want to miss out on potential market gains. Bob decides to sell his grain on May 1st with a minimum price contract. If a November $12.50 call costs 70 cents on May 1st, Bob’s cash price on his contract is written at $11.30 ($12.00 cash price – 70 cent option cost). If November futures increase to $13.50/bushel, Bob can exercise his option and his final cash price would increase to $12.30/bushel, which is 30 cents higher than the day he contracted. If November futures decrease to $11.00/bushel, Bob’s option would expire worthless and his cash price remains unchanged at $11.30 and Bob is out the cost of the option premium.
Minimum Price Contract Advantages:
- Contract establishes a floor price while giving the grower the ability to capture rallies in the futures market
- Option costs are deducted from the price and are not paid out of pocket up front
- Option is in CHS SunPrairie’s hedge account so there is no need for the grower to set up their own hedge account to have a minimum price contract
Minimum Price Contract Disadvantages:
- Futures prices may not improve before option expiration, meaning the option will expire worthless and the grower is out the premium
- Option premiums can be costly due to volatile futures markets
Delayed Price (DP) Contracts
These contracts allow the grower to haul their grain today but to price it by a date established by CHS SunPrairie.
How does it work?
Grower hauls their grain to CHS SunPrairie but does not like the cash price at the time. The DP contract allows the grower to move grain and wait to lock in a price until the contract reaches its expiration date or prices become more attractive and the grower sells.
DP Contract Advantages:
- CHS SunPrairie assumes risk of storing grain and keeping it in condition
- Grower can wait to sell grain until price becomes more attractive
- Grower can haul now and price later
DP Contract Disadvantages:
- DP Contracts usually have storage charges, which are set by CHS SunPrairie and based on space availability, rail performance and market conditions
- Price of grain may be highest when grain was hauled, there is no price protection should the markets take prices lower
Act of God (AOG) Contracts:
These contracts come with a clause that lets the grower out of the responsibility of delivering the contract should an Act of God event occur.
How does it work?
The grower agrees to deliver a specific quality and quantity of grain at a set delivery period at a specified price. The grower is given peace of mind if an AOG event occurs. Examples of AOG events include, but are not limited to, flooding, hail, wind or an early frost that damage the crop or decrease production. Should an event occur the grower must notify CHS SunPrairie and the grower is released of his/her obligation to deliver on the contract.
AOG Contract Advantages:
- Grower has peace of mind when contracting grain and does not have to worry about production issues due to AOG event
- Grower must simply supply insurance documentation indicating planting and production to be released from their contract should an AOG event occur
AOG Contract Disadvantages:
- Not all commodities have AOG contracts available
- There is not a way to capture any potential price increases once an AOG contract has been made
