My Take On Forward Contracting

This is a little more technical than most of my posts and refers to grain farming. Not sure how many readers raise grain but this is something I learned about that I'd like to share.

So basically, we grow the corn, we take it to the elevator, and then we either sell it right away (if prices are good) or we start to incur storage costs on it and don't sell it until prices come back up. Supposedly, this is the first year in the last 10 where a farmer didn't make money by storing grain until after the 1st of the year. Of course that would happen during our first harvest year, why not!?

So since we are beginning field work and need $$$ to buy fertilizer and seed, we really need the money from last year's corn. Plus, we don't want to pay to store it much longer. However, prices are still low enough that I'm not convinced they will even cover the cost of growing that corn. So, there is another option available: forward contracting. Basically, we sell the corn today and a check is mailed to us. The check is for the current price ($3.42/bushel) times the # of bushels we have minus any unpaid storage AND minus, in our case, $0.37/bu for this forward contracting option. This storage costs will stop the day we sell. The $0.37 gives us the option to "sell" again in the next 3 months in order to benefit if prices go up.

Say in June prices go up to $4.00. We could "sell" then and get a check for the extra $0.58 x # of bu. We can only do that once and then our "contract" is done. I think. The downside is that if prices don't go up we would actually lose money. If prices go up $0.37 we would get back what it cost us to have the option but would come out the same as if we had sold outright at today's current prices.

Is this understandable? I know it is a confusing topic, so I thought I'd share what I know. Maybe someone will Google it and find this post. Do you see what crop farming makes me batty!? I hate gambling, and that is what we do in this line of work.