What’s the difference between a ‘spot’ contract and a ‘forward’ cash contract? You may have heard these terms before, or, they may be totally unfamiliar to you. In either case, we’re going to make sure that by the end of this post you feel comfortable with both of them!
Consider this potential scenario:
Throughout the spring & summer, you made several cash sales with your local elevator for soybeans to deliver at harvest. The average cash price on these sales is $9.15/bushel, and they equate to a total of 30,000 bushels.
Fast forward to harvest:
You’re still harvesting soybeans and have finished delivering the 30,000 bushels you had contracted. Those 30,000 bushels you’d contracted prior to harvest was just 60% of your expected production. Yields are coming in around expectations, so you’re looking at another approx. 20,000 bushels you need to sell.
Since you filled your existing contracts and your on farm storage is full, you’ll need to deliver these additional beans to your local elevator right out of the field.
Today, the cash price at the elevator is $8.50, which is $.65 lower than the price you locked in on your contracts made in the spring and summer months. However, $8.50 is still above your breakeven and you’re not confident prices will improve judging by the large U.S. crop and less than impressive export numbers.
Now what?
Considering you don’t have any open storage left on your farm, and you’re not seeing enough market potential to pay the high elevator storage rates, you’re going to spot sell the soybeans as you haul them from the field to the elevator.
Wait a second–did you just say, SPOT?
Good catch! Since it’s been brought to the table…let’s talk ‘spot’ selling. 🙂
The key part of the sentence above is that the beans are sold as they’re hauled in. Thus, there’s no previously created contract you’re applying the bushels to when you haul them in.
Remember, you already filled, or delivered, the open contracts you had.
With a spot cash sale, the cash price you receive on the soybeans you deliver is the cash price the elevator is paying the day the beans are hauled.
Now, what about those 30,000 bushels you contracted in the spring & summer, what are those called?
The contracts that were made prior to harvest/delivery of the bushels are considered “forward sales.” Think about it like this: When you made the sales, you were looking ‘forward’ and making a plan for the bushels you were expecting to deliver at harvest.
When you saw pricing opportunities that were lucrative for your operation throughout the spring and summer months, you decided to forward contract some of your expected production, knowing it would have to be hauled in at harvest.
Thus, the contract date came before the delivery date.
In this example of a forward contract:
Contract Date = June & July 2019
Delivery Date on the Contract = October or November 2019 (harvest)
Big Question:
What’s the benefit of a FORWARD cash sale over a SPOT sale?
- Forward sales allow you to lock-in a price on your bushels today, even though they will be delivered in the future. By locking in the price, you take price risk off the table for the bushels contracted gain piece-of-mind.
- Furthermore, if you’re looking at a harvest spot cash sale, like we did in this example, harvest tends to be the time of year with the lowest posted prices for corn and soybeans. Thus, in most years, making a forward sale for harvest delivery will result in a higher price than waiting to sell at harvest.
Something to remember:
There is a place in your marketing plan for both spot and forward cash sales. Forward cash selling is great, but it’s not usually something an operation can do for 100% of their production.
There’s always a risk you won’t produce the quantity you expect due to a variety of crop stresses throughout the year, so forward selling is safely done up to your crop insurance protection level rather than up to 100% of your expected production.
With that in mind, there will be a percentage of your bushels that will have to be sold as they come off the combine or stored commercially (assuming you don’t have on farm storage for those bushels).
Additionally, there are good opportunities to spot sell when marketing stored bushels. For example, when the price at your local buyer moves to a level that’s profitable in the winter, spring or summer and you have bushels stored, hauling in stored bushels and spot contracting definitely has it’s place in your marketing plan.