Consider Put in Preharvest Sales Strategy

The use of elevator contracts as part of your marketing strategy makes farm management sense, says George Flaskerud, NDSU extension crop marketing specialist, especially on that portion of production that can be produced with near certainty (the first one-third is a good bet in the case of pre-harvest sales).

Cash forward contracts, hedged-to-arrive contracts (sometimes called futures fixed contracts), and minimum price contracts are contract alternatives for making preharvest sales. The best contract for a producer to use largely depends on current and expected futures prices, basis and cash prices.

The put option should be considered as well, because it leaves upside price potential open and does not require delivery. Consider using put options where uncertainty is the greatest. In effect, this would be when uncertainty involves not only price but production, probably the second one-third of production sold prior to harvest.

Generally, selling one-third of anticipated production using a cash forward contract or a futures fixed contract (HTA) and one-third using put options, manages an enormous amount of price risk, says Flaskerud.  A floor price is established on two-thirds of anticipated production, but the price is still open to the upside on two-thirds.