Comparison of Price Risk Management Tools

A set of vocabulary flashcards covering various grain marketing and price risk management instruments including forward contracts, futures, options, swaps, and pools.

Fixed Grade Contract

A marketing tool where a seller commits to deliver an agreed tonnage of grain of a certain quality at a specified time and place for a known price.

Washout

The action a grower must take (either buying grain in or paying a settlement) if they are unable to supply the contracted quality and tonnage specified in a fixed grade or multi-varietal contract.

Multi-Varietal Contract

A contract that secures a price for a specific tonnage without committing to a particular quality, using a varietal payment system rather than binned grade.

Varietal Payment System

The system used by Multi-Varietal contracts to determine payments based on grain variety, covering wide ranges of protein ($6-16\%$), screenings ($0-10\%$), and moisture ($8-12\%$).

Multi-Grade Contract

A forward contract that fixes four components (time, place, quantity, and price) at the time of contracting, while the fifth component (quality) is fixed when grain is delivered.

Futures Contract

An exchange-traded hedging mechanism, such as those on the ASX, that decouples the time of pricing grain from the time of delivering physical grain.

Basis Risk

The risk that local prices will move differently than international prices; this is virtually eliminated with ASX grain futures because they relate to local markets.

Puts

Options on futures that serve as price floors for practical farm purposes.

Calls

Options on futures that serve as price ceilings for practical farm purposes.

Commodity Swaps

Financial instruments that do not require delivery of grain and have no production risk or maintenance margins, but often have hidden operator margins in the price.

Fixed Basis Contract

A contract that allows the seller to manage the futures, exchange rate, and basis components separately and lock them in at different times.

Managed Basis Contract

An arrangement where the seller locks in futures and exchange rate components (usually prior to harvest) while the buyer manages the basis derived from the international marketplace.

Pools

A risk management tool where all marketing and hedging decisions are handed over to professional managers, requiring no pre-harvest commitments or production risk.

Cliff Face Pricing

A pricing phenomenon avoided by Multi-Varietal contracts by paying quality increments over a much wider range of protein, screenings, and moisture levels.

Strike Price

The specific price level chosen in an option contract, which can be set at or out of the money.