May 15, 2018
During the past 20 years or so, a host of new types of marketing contracts have been offered by major grain companies or professional marketing advisory services. In fact, new ones are still being developed and offered today.
All fall under the umbrella of what’s called “new generation contracts” (NGCs) because they are more than just new tools: they involve new decision-making processes and even new decision-makers operating on behalf of farmers who decide to outsource the marketing of at least part of their production to professionals.
Traditional marketing strategies involve discretionary sales by the farmer, sales the farm makes on the advice of an advisory service, or some combination of the two.
AgMAS is an acronym for Agricultural Market Advisory Services. It was formed at the University of Illinois and its initial mission was evaluating performance of all major market advisory services during a 10-year period from 1995-2004 by crop or livestock category.
The team of six AgMAS ag economists also did a landmark study of comparative performance of various NGC products in 2003. They first established the three different categories of NGCs that have since become widely accepted:
1. Automated Pricing Contracts follow predetermined, non-discretionary pricing rules designed to market a given quantity of grain at regular intervals over a period of time to achieve the average price during that period. If the prices locked in are futures prices, then setting the basis is typically left to the farmer. While selling at regular intervals is not a complicated strategy and could easily be done by the farmer, the automated contracts take the emotional element out of such decisions and the discipline to adopt such a plan is effectively on autopilot, as some might say.
2. Managed Hedging Contracts price a contracted volume of production on the recommendations of farmer-selected advisory services over a defined period of time known as the pricing window. The farmer may set a minimum selling price, but there are no guarantees in these contracts that even the average price will be achieved. The only recourse a farmer has, if he or she is dissatisfied with the pricing performance, is to pick another advisor in the future.
3. Combination Contracts combine elements of the first two types. They price the enrolled grain in the cash market under automated pricing rules, but also allow the farmer to share in any added gains achieved in futures hedging (if any) by the producer-selected professional advisor. In some such programs, a producer can enroll differing quantities of the same crop among several participating advisors to spread the risk of choosing the best advisor.
According to a 2007 study entitled "New Generation Grain Contracts" published by Dr. Steven D. Johnson, Farm Management Field Specialist at Iowa State University Extension, these challenges include:
Inability to “pull the trigger” on sales for fear of pricing too much too soon
Excessive emotion in volatile markets that leads to indecision
The complexities from a variety of traditional marketing tools involving the farmer directly in trading futures and/or options
Lack of discipline following a marketing plan and simply set price targets higher instead
The views expressed in this article are the author's alone and not those of Farmer's Business Network, Inc., its affiliates or members.
May 15, 2018