What do you do if you have crop forward priced and are in a total crop wreck

[charliep]

SASKFARMER suggested this topic so I am going to start the thread.

My thoughts

I would start by being very realistic about what I think my yield prospects are. Not what could be but what I see today. Best judgement today, will I have enough volume to cover what I have contracted.

I suspect in many cases, a demonstrated total crop failure based on crop insurance write off will be needed. If you know you are in a total yield failure and either have done so already or will be making a claim to crop, I would be in to talk to the grain company right away. You are on the line for the contract but they also have a sales contract they need to fill. Allows both of you (yourself and the grain) to work through things. Won't pre-guess but a needed conversation.

For those with futures/hedged, need to decide if stay or exit. I suspect that has been made.

You also have the alternative of buying calls on market dips to replace crop you don't think you will produce. You can also buy calls on crop you would have liked to have produced/lost yields but know when you have left the world of a hedger/risk manager and entered the world of a speculator.

Others thoughts.

[farmaholic]

Don't sign contracts without AOG clauses...

You're more of a speculator than a hedger if you sign a contract without an AOG clause before the grain is in the bin.

How is the Grain Co. going to replace tonnes cheaper than the contract price this year? Get ready to ante up.

[bucket]

Seems that some sort of physical grain needs to show up to make the rest of the scheme work.

That and the ability to deliver.

[Hopalong]

Never say never.
If other aspects outweigh AOG benefits, should look at other ways to handle risk.
Like meeting margin calls, some of us can never be comfortable with paying out money even if it results in a higher net return.

[BreadWinner]

It isn't in the bin till its in the bin!!!! If your contracting without an act of god you limit yourself to what you can afford to pay. The companies Will not be letting guys out of these commitments!!!! Get out now if you have no crop, it will only get worse as time passes. Line companies are going to be the worst to deal with. Ask if you can roll these contracts to next year is your best option. Don't be scared to tell them that this could bankrupt you!!! Good luck and hope everyone can find a way out of these stressful situations.

[cottonpicken]

The line companies are forward sold so now what is still out there they have to fight for theoretically....if there is a shift in price the margin loss will be passed onto the contract holders who are short.

[charliep]

Perhaps why market price volatility is not a bad thing. If you know you are in a total production wreck verified by a crop insurance write off, use market dips to get out. Basis levels are still fairly weak at least if look at their bids (liquidating a contract may be different).

TOM4CWB mentioned getting someone else to fill the contract. You may have to top up the neighbors price but you have to compare to what the grain company is proposing your buy out will be. Not allowed in every contract so need to read what you signed.

[Braveheart]

I the price is high enough it would be easy to get someone to fill the contract.

Companies approach this issue differently, and differently depending on the customer. The "non loyal" whining types will, and should get different treatment than a loyal customer.

First thing as the grower is to be honest about your delivery prospects and your financial situation. You may be able to roll your position (for a fee) forward,to next crop year.

If you've priced 100% and can't deliver, a company may have to take steps to apply some discipline to you.

Any company that just flat out said, " the money or the grain", would lose me as a customer forever.

[farmaholic]

Good point Charlie. Could well be alot cheaper.

[mbdog]

Bit of crystal balling required...fundamental supply/demand risk vs macros forecasting where contract delivery obligation resides. Thinking out loud...talk to elevator to seek buy-out options but maybe I go long futures. Short term is futures lift...risk to me. If futures drop should be on macros...ultimate floor at 450ish. Thought process would be to be able to handle margin call 70 bucks...but may get out of contract better on a macro dip...and hold long paper into deferred fundamentally driven lift after dip. No worse off today going long futures while still being obligated to supply.... buys some time to maybe trade out/use market tools-volatiity depending on ones opinion of market. My thought are in anticipation of a macro dip...get out of contract...then hold/roll(if ness) futures on lift at or above 527...just my opinion though...could be all wrong. Wildcard is basis now and its effect on futures/cash...lots of moving parts there.. If you do nothing upside risk in futures is wide open in a potentially fundamental bullish situation. Doing nothing/ignoring/complaining/opining is not an option to this question. Just my thought process to question...not in this boat at this time. Thanks for bringing up discussion of when good marketing strategy goes bad Charlie.

[agchat]

Charlie, like I have said on here before, I am what people would now be getting to called a old timer. Yes times are a changing, BUT this is a perfect example of counting your chickens before they hatch. Once some on here are caught a few times, they will understand that saying. Only solution is like farmaholic says AOG. Maybe that will catch on some day.

[Grahamp]

I am not a shill for GARS but one of their allowable expenses is buying out contracts.

[cottonpicken]

Sure would be fun if everyone got out of their contracts grain or no grain

[Hopperbin]

Which is what a lot of farmers are asking. Which is why prices are where they are. Personally if I was short I would not try to get out now as every farmer is a bull at the moment.

[oneoff]

Well I'd personally look at history as recent as last fall.

Remember the very biggest operators (some of whom aren't really in the picture after their dispersal sales of assets) and the rest of farmers who did ( or didn't) fill their commitments to quality and volume of contracted durum at about $8.00ish last fall.

By the time those contracts were settled with buyouts; there were offers of about $15.00 US for supplies to meet those shortfalls.

Simple,, short analysis is that those on the hook netted about $1.50 (approx) for their fuzzy crop; and the balance of the penalties went to bidding up the spot market.

Then when that "little" problem was over; you noticed the top quality bids slid to about one half of their highs.

All during the time frame when there was next to zero high quality supplies for months; and basically not an additional bushel of new crop supplies produced anywhere in the whole world.

If you see today's looming problem; my advice is for every farmer not to get into that position again. Is it really worth it? Does the risk outweigh the benefits? Can't everyone see that the major benefits are all to the purchasing side of the equation?

This contracting system is price depressing; where the lowest price really is the law.

For those who vehemently disagree; then I'd love to hear the brutal explanation of how to survive the required buyout of those without Acts of God in their contracts..