June 18, 2018

A Floor and Maybe More: Protect Profit Potential with Minimum Price Contracts

In times like this, wouldn’t it be great to have price protection against the downside of weather markets and still be able to capture upside potential? It’s not only possible, but also quite simple with a minimum price contract.

“We’ve seen a lot of interest in minimum price contracts,” said Karl Setzer, risk management team leader for MaxYield Cooperative. “The potential for this contract to work is much greater when the market isn’t near seasonal or historical highs.” A minimum price contract involves a simple, two-step process, including:

  1. Cash sale
  2. Re-ownership of the grain in the deferred months, with a set price floor

While some risk management tools still have downside risk, that’s not the case with the minimum price contract. Along with price protection, you retain the opportunity to take advantage of market rallies.

For example, on minimum price contract bushels that MaxYield was pricing in mid-October, the market was trading at $3.88 for September 2018. “Since we put the re-ownership out into future months, rather than the spot market, you have the chance to participate in a weather market in the next growing season,” Setzer said.

Think of it like insurance

Think of a minimum price contract like car insurance and homeowners insurance. When you buy these risk management tools, you hope that you never have to collect on them. If you do suffer a loss, however, the premium seems like a small price to pay for the coverage.

This is similar to a minimum price contract, which offers you a more affordable way to retain ownership, protect against losses, capture future weather rallies and avoid grain storage costs.

“Storage could easily cost you twice as much as the fee for the minimum price contract,” Setzer said. “This contract almost sounds too good to be true, but it’s the real deal.”

After you pay the fee for this contract, there are no hidden costs or additional fees. “It’s not like buying a car and having to pay more money for rust protection,” Setzer said. “With a minimum price contract, everything is spelled out right up front.”

In addition, you only have to handle the grain once with a minimum price contract. Don’t want to mess with hauling grain to the elevator? Sign up for MaxYield’s convenient, on-farm grain pickup service and check one more thing off your to-do list.

Effective risk management doesn’t have to be fancy

Along with minimum price contracts, MaxYield offers a variety of risk management programs and tailors them to your specific situation.

“We don’t believe in one-size-fits-all, cookie cutter solutions, but we do believe effective risk management doesn’t have to be complex,” said Setzer, who added that no MaxYield grain team members work on commission. “Think of risk management like an old farm truck. It doesn’t have to be fancy to work for you.”

Don’t overlook one of the biggest benefits of the K.I.S.S. (keep it simple, stupid) philosophy of risk management, Setzer said. “The simpler your system is, the more likely you are to follow it.”

Let’s talk

Want to learn more about minimum price contracts or other risk management tools from MaxYield? Interested in on-farm grain pickup? Contact your nearest MaxYield location for details.

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