John: Purchase contracts are just that. The purchaser agrees to pay so much for so many bushels of grain. IF your short you have to "buy" grain at the current market price to "fill" the contract. This is done on "paper" you do not have to go "buy" grain and deliver it. You may have to pay a handling fee but most contracts are closed out this way. Even if you deliver your contracts there will be a settlement on any bushels over or below the contracted bushels. So if you sold 1000 bushels and delivered 1010 bushels the extra would sale at current market price. Same way for a shortage too. As you deliver 950 bushels on the contract. Your not going to end a semi load down to just sell 50 bushels. They would buy the grain on paper and charge you a fee for the few bushels your short.
So if your selling price is below the current market and you do not have the bushels to sell, you would be paying the difference to buy enough grain to fill your contracts.
I use purchase contracts a lot. I try to have 80% or more of my grain priced before harvest. I also lock in my inputs as much as possible too.
I currently have cash grain contracts out two more years. I have Dec. 2014 contracts that are WELL above current market price. I never try for home runs. I try to lock in a profit whenever the prices allow me too. My contracts look like home runs compared to current cash grains prices but if you look at the cost of production they are just profitable.
The biggest thing to remember on cash grain contracts is to ALWAYS have the grain to fill them. Even if your under current market but contracted above your cost of production you will not lose money. You may have lost an opportunity for a higher profit but you will still always make money.
So if you produce 50,000 bushels of corn don't go out and contract a 100,000 bushels of corn. Guys try this when they are just "sure" that their contract price is well above market. This speculation sinks most of those that try it.
I see to many guys set around without any type of marketing plan other than waiting and hopping. That costs them money year end and year out.
They will not contract any because the market is not at the 10 year high. So they pass up good profits for the hope of sky high prices again.
This summer was an example of this. You could lock in $11-12 soybeans prices but guys still wanted that $14-15 price and road the market down to $9-10. So "hoping" for higher prices made them pass over a "good" price.
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