Locking the price means agreeing today with a buyer on what you will be paid for grain you deliver later. The buyer’s forward bid comes as one price, and a fee for carrying your price risk is built into it. Subtract the futures price from the bid and you have the basis in the bid, which you compare with the basis you expect at delivery. On 10,000 bushels of soybeans, a gap of 20 cents a bushel costs $2,000. Whether that fee is worth paying depends on what you owe before delivery. Write the bid, both bases, the fee and the volume you decide on one sheet, with a date and a name.
Where is the fee in a bid that comes as one price?
In the basis. On a Tuesday in August, the elevator near a soybean farm in central Iowa offers $10.40 a bushel for October delivery, good until the end of the day. November futures, the public exchange price for soybeans, trade at $11.05. The bid sits 65 cents under futures. That distance is the basis in the bid: the local cash price minus the futures price.
Whoever built the price took your price risk and charged for it inside the quote. The futures part is a public number the buyer cannot move, so the fee can only sit in the basis.
Kansas State University put a figure on that fee for wheat. Taylor and two colleagues collected forward bids every Wednesday at 18 elevators and estimated the cost of forward contracting at $0.086 a bushel for 2002 to 2007. For 2008 to 2012, once the local basis turned volatile, the estimate rose to $0.327 a bushel.
Per bushel that looks small, and a fee built into a price never arrives as a bill. On a 5,000-bushel contract it came to $430 in the first period and $1,635 in the second. No contract had a line for either amount. It reached the farmer as “a wider implicit basis bid”, a bid whose basis sat further under futures.
The authors describe elevators that guarantee a harvest price “in exchange for a fee, which we call a risk premium”, and that charge more as the local basis gets less predictable. At an Oklahoma river terminal, Townsend and Brorsen put the cost of forward contracting wheat at six to eight cents a bushel, 100 days before delivery. The terminal’s manager “believes that no risk premium is included in the forward bids, but the data show that there is”.
Both are studies of wheat in particular places and years. They show that the fee exists and moves with the basis. They do not tell you what your buyer charges, and neither measured soybeans.
How do you find the fee with your own numbers?
Compare the basis in the bid with the basis you expect at delivery, because the basis moves far less from year to year than the price does. In Kansas State’s extension primer on basis, Dhuyvetter compares two wheat years at Dodge City: an average difference of $1.42 a bushel in price levels, against only $0.17 a bushel in basis. Nobody can tell you next October’s price. From the price record you keep, a list of quotes with the source and date of each, you can estimate next October’s basis fairly well.
Dhuyvetter turns that into a test for an offer: “If an expected basis is known, a forward contract bid can be evaluated.” The Iowa farm reads the past Octobers at the same elevator and expects a basis of 45 cents under futures.
If waiting would cost you something that locking avoids, such as interest or shrink on grain you would carry to a later sale, subtract it from the $10.60. If you deliver on the same day either way, that cost is zero.
Is a 20-cent fee worth paying when the price might rise?
The fee is a small edge against a price that can move a dollar or more either way, so the expected price does not settle it. Write the lowest and the highest delivery price from your own record, letting a bad year you lived through set the low. The Iowa farm writes $9.20 and $12.10.
Do not trust a range just because it feels comfortable. In a peer-reviewed Brazilian study, Cruz Júnior and four colleagues asked 90 maize farmers in late 2008 to spread their price expectations across a list of price ranges. Of the 81 whose answers could be compared, 62 gave a spread narrower than the futures market had actually produced. The authors read this as farmers holding a perception of risk below the risk the market carries.
The 90 were volunteers, and the authors say the sample does not guarantee statistical representation of Brazilian maize growers. So take the pattern, not the exact share: many of these farmers pictured a narrower range than the market delivered.
What decides is which end of the range you can live with, and the two ends do not weigh the same. The Iowa farm expects 30,000 bushels and owes $300,000 before delivery, between a loan installment and the input bill. Soybeans must sell for $10.00 a bushel to cover that. At the high of $12.10, the extra money makes a better year. At the low of $9.20, the sale brings $276,000 and falls $24,000 short of a payment with a fixed date, and then the problem is a talk with the lender.
Check the low end against the installment due that month and against the break-even price, the lowest price that covers what the crop cost you to produce. The protection costs the fee and one more thing: a locked price does not rise when the market does, so you give up the top of the range.
What can still go wrong after you sign?
Three things the subtractions cannot settle. The first is quantity. MATba, the Buenos Aires grain futures exchange, teaches that a forward contract fixes quality, quantity, delivery time and place, and price. Performance depends on the good faith of both parties. If you harvest less than you signed for, you still owe the bushels. Read the clause that says what happens when you deliver less.
The second is the buyer’s specification. A phone call cannot tell you whether a buyer will honor a contract. Spend it on what you can check: which grade, what moisture, which delivery window, and what happens to the price if the load grades below the agreement.
The third is a fee that comes out in your favor. If the basis in the bid is better than the one you expect, the buyer pays you more than your record says the market will. Dhuyvetter describes this case with cattle: a basis bid stronger than normal is a strong financial incentive to sell today for future delivery. Take it as a reason to commit volume, never as a reason to sign past what a bad harvest delivers.
How much do you lock, and what goes on the sheet first?
Lock the share of the crop that has to pay for things due whatever happens, and leave the rest open. The volume has two limits. The floor is the price: nothing signed below the break-even price. The ceiling is the quantity: the bushels your worst harvest still delivers, not the amount you expect.
Check that volume against what already has a price and against the share your written selling plan sets for this date. Only eight of the 90 Brazilian farmers had sold anything ahead, and none had sold all of it. The practical question is how much to lock more than whether to lock.
When the fee is the number that stands out, change what you ask for rather than whether you sign. Ask the buyer to quote the delivery-month futures and the basis as two numbers instead of one price. An offer in two numbers can be negotiated, and a basis you were told is one you can file and compare next year. The free forward pricing calculator on this site runs the same subtractions.
If you want price protection without the delivery promise, futures on an exchange handle the same risk another way: you keep the basis risk instead of paying a basis fee. Townsend and Brorsen conclude that the costs of forward contracting are substantially larger than the cost of hedging, for one terminal in those years. That is not advice about your buyer, and a buyer committed to take your grain on a set date can be worth something on its own. The article on what price you keep after hedging works through that route.
Half an hour, with the offer on the table, your price record open and a sheet of paper for this offer.
Whichever way you decide, the answer becomes a line in your price record. Kept offer after offer, those lines are part of farm management: next year you can see what each lock cost you and whether the fee bought protection you needed. Other articles in the library’s marketing section build on the same record.