Description
This contract, also known as a "No Price Established" contract, provides the seller the opportunity to deliver
and transfer ownership on the contract date, but without setting
a sales price. The buyer generally charges an up front
or monthly fee. The producer retains the basis and futures
price risk and opportunity in this contract until the sales price
is determined.
Example: On November 1, a producer delivers
to the local elevator and enters into a deferred price contract.
On January 1, the producer prices the contract at the current
elevator bid, less the delayed price (DP) charge.
Risk to Seller
The seller retains futures price risk and basis price risk
until the pricing date. The seller also is subject to production
risk; that is, the producer is responsible for delivering the
contracted amount on the delivery date.
Risk to Buyer
If the buyer maintains ownership, there is no futures price
risk or basis price risk. However, if the buyer chooses to sell
these "unpriced" bushels to a third party (processor,
feedlot, etc.), the buyer assumes basis risk and, potentially,
futures risk and spread risk.
Who Might Use This Contract?
A producer who believes the market will rise and who is in
a strong enough financial position to bear the risk of a market
turndown.
Upside Price Potential. Even though the producer transfers
ownership to the buyer, he or she retains the opportunity to
benefit from prices rising.
Downside Price Potential. The producer also retains
the risk that prices will fall between the time the contract
is entered and the date on which the sales price is determined.
When Might This Contract Perform Well?
This contract will perform well if markets rise following
the contract date. However, this outcome may depend on the producer
judging correctly when to establish the sales price.
When Might This Contract Perform Poorly?
This contract may not perform up to the producer's expectations
if prices fall after the contract date.
Mention of product names or firms does not
necessarily constitute endorsement by the Risk Management Agency
or the U.S. Department of Agriculture over others not
mentioned, and is for information purposes only.
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