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Potential Problems with Time Limitations on Credit Sale Contracts for Specialty Grains

Roger G. Ginder, Economics Department, Iowa State University

 

The relatively small (but rapidly growing) premium and specialty grain sector uses several different types of contracts. At this time, credit sales contracts are used in the majority of specialty grain marketing arrangements. A typical specialty grain contract would specify the production of grain with a desired trait and payment of a per bushel price premium (above the local open market price). The final price is therefore established using a commodity price reference. In a few cases, a date is specified for establishing the reference price but in most cases the producer is free to determine when the grain is to be priced.


Marketing specialty grains efficiently requires a great deal of coordination. Segregated storage, handling, and transportation are required to preserve the trait. The flow of grain to the end users must be more carefully timed and managed to meet the end users needs throughout the year. These requirements make it necessary to plan production and marketing well in advance of final use. It is not unusual for specialty production contracts to be issued in November, December or January for a crop to be planted the following April, May or June. The storage and marketing period may also be extended through July or August of the next year.


A "buyers call" provision is often included in these contracts. This is done to better match the physical delivery of specialty grains to the end user's limited plant or handling capacity. Combining a "buyers call" provision with a price later provision, allows the physical product delivery to be decoupled from the farmers pricing decision. Under this arrangement, the end user may take delivery and title the product in January when it is needed, but permit the producer to price it at some later time in the marketing year (i.e., February-August). The "buyers call" provision permits delivery of grain when it is needed and the price later provision allows the grain to be processed, fed, or shipped without forcing the farmer to select a reference price prior to delivery. Without this flexibility, farmers may not be willing to deliver the amount of grain the user needs in the fall and winter when prices are usually low. Likewise, farmers may want to deliver more volume than the user can accommodate later in the marketing year when prices are usually higher.


Placing a time limitation on these specialty contracts of less than 18 months could create serious problems for both contractors and producers. It is necessary for contractors to issue their specialty contracts early to assure they will obtain enough volume to meet their needs. Since specialty contracts must be issued before farmers purchase and plant commodity corn or soybean seed, they are typically issued 3-6 months before planting season. Pricing flexibility is also necessary to permit farmers to select a higher commodity reference price for their grain or soybeans than may be available when product "is called" by the user. Under some circumstances, the grain may be contracted but not priced for up to 21 months from initiation of the contract.

EXAMPLE OF POTENTIAL PROBLEM SITUATION

Nov. 1995
Contractor offers producer a contract to produce 5000 bushels of specialty soybeans under a credit sale contract with a "buyers call" provision. The producer is to price the beans during the period November 1996-August 1997 by selecting a commodity price as a reference. The contractor will pay a 75¢/bushel premium over the reference price selected. The contractor may "call" the soybeans at any time in the period from November 1996 - September 1997.

March-April
Specialty seed is obtained by the producer.

May 1996
Crop is planted.

Nov. 1996
Crop is harvested and placed into storage by the producer.

Feb. 1997
The crop is called and delivered to contrator's specified location. Contractor then sells or processes the product delivered.

Aug. 1997
Producer selects reference price and receives payment of reference price plus the 75¢ premium.


The grain has been under contract for approximately 21 months before reference price is selected. The producer has not been forced to price at a disadvantage. The processor has matched the flow of product to his facility to the capacity to handle or process it.