DELIVERY PURCHASE CONTRACTS

PURCHASE CONTRACT: This contract is for a specified quantity & quality of grain for a specified delivery time, with the price of contract set at the time the contract is made for the specific delivery time. Title of the grain is passed to DMG once the grain is unloaded at the elevator. This is the most widely used method of marketing grain.

ADVANTAGES: The price is established when the contract is written; Payment is made once the grain is delivered or can be deferred to a later date if desired.  Discounts and premiums for quality are typically established at the time the contract is written, with the exception being "NEW" crop grain, then the quality discounts and premiums might be established at time of delivery; Risk of price decrease is eliminated.

DISADVANTAGES: The price is locked in and the seller can't take advantage of and price increases; The seller is obligated to fill the contract and deliver the quantity specified in the delivery period specified on the contract (NO ACT OF GOD CLAUSE); cancellation charges or roll charges may apply the seller is unable to fill the contract.

EXAMPLES OF CANCELLATION CHARGE: Cancellations can work one of two ways:

Cancellation Example:  Contract 5,000 bushels of "NEW" crop winter wheat for July delivery at $6.00/bushel. In June the crop gets hailed and only 2000 bushels are delivered against the contract, leaving it short 3000 bushels.  On the date the loss is reported to DMG that the remaining 3000 bushels can’t be delivered, the seller may elect to cancel the balance of the contract.  For example if the price for July delivery winter wheat at cancellation is $6.20/bushel, the difference between the contract price and the current price is $.20/bushel ($6.20 minus $6.00). DMG would cancel the contract, but the seller would owe DMG $600.00 (3000 bushels times $.20). 

If the current price at the time of cancellation has dropped below the contract price, then the contracted could be cancelled at no charge to either party. 

Roll Example:  Another option to a shortfall would be to “roll” the contract to different delivery period.  In the event of a crop failure that would be probably be the next year.  To roll we compare the current price to the next year’s price and apply that difference + or – to the contract and change the date.  One scenario would be to use the same $6.00 contract and on the date of reporting the hail loss the current price is $5.75 and the following year’s price is $6.00.  Since next year’s price is higher, the seller gains 25 cents ($5.75 compared to $6.00) and it is applied it to the existing contract to make the rolled contract price $6.25 before any applicable admin charges.

Another scenario would if the current price at the time of rolling is higher than the price for next year that difference would be deducted from the original contract price.  Use the same $6.00 contract but on the date of reporting the hail loss the current price is $5.60 and the following year’s price is $5.50.  Then 10 cents per bushel would be deducted from the $6.00 to make it $5.90.