{"id":794,"date":"2024-03-14T17:41:16","date_gmt":"2024-03-14T17:41:16","guid":{"rendered":"https:\/\/welcome.combyne.ag\/resource-centre\/?p=794"},"modified":"2024-03-19T16:48:44","modified_gmt":"2024-03-19T16:48:44","slug":"part-i-target-price-contracts-and-the-farms-perspective","status":"publish","type":"post","link":"https:\/\/welcome.combyne.ag\/resource-centre\/part-i-target-price-contracts-and-the-farms-perspective\/","title":{"rendered":"Part I: Target Price Contracts and The Farm\u2019s Perspective"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_58 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\" role=\"button\"><label for=\"item-6a09daec8fd58\" ><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input aria-label=\"Toggle\" aria-label=\"item-6a09daec8fd58\"  type=\"checkbox\" id=\"item-6a09daec8fd58\"><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/part-i-target-price-contracts-and-the-farms-perspective\/#Target_Price_Contracts_%E2%80%93_Key_Points\" title=\"Target Price Contracts &#8211; Key Points\">Target Price Contracts &#8211; Key Points<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/part-i-target-price-contracts-and-the-farms-perspective\/#Background\" title=\"Background\">Background<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/part-i-target-price-contracts-and-the-farms-perspective\/#The_Farms_Perspective\" title=\"The Farm&#8217;s Perspective\">The Farm&#8217;s Perspective<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/part-i-target-price-contracts-and-the-farms-perspective\/#But_why_that_price\" title=\"But why that price?\">But why that price?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/part-i-target-price-contracts-and-the-farms-perspective\/#One_TPC_with_one_company_%E2%80%93_or_one_with_each_company\" title=\"One TPC with one company \u2013 or one with each company?\">One TPC with one company \u2013 or one with each company?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/welcome.combyne.ag\/resource-centre\/part-i-target-price-contracts-and-the-farms-perspective\/#Alternatives_that_provide_similar_results\" title=\"Alternatives that provide similar results\">Alternatives that provide similar results<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"Target_Price_Contracts_%E2%80%93_Key_Points\"><\/span><b>Target Price Contracts &#8211; <\/b><b>Key Points<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">\u25cf Target Price Contracts (TPCs) \u2013 also referred to by other names such as Grain Pricing Orders (GPOs) \u2013 can make life easier for farmers by reducing the need to watch markets closely.\u00a0 Used effectively, they can help get better prices.\u00a0 However, there are pitfalls to avoid, the most obvious is that entering into a TPC limits your market exposure, leading to the potential of missing better pricing opportunities. There are better alternatives.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf TPCs are a great tool for grain companies to manage their risk when merchandising grain. They provide a view of the market in terms of where farms are willing to sell, while providing both price and supply assurances. In effect, TPCs are very much like call options \u2013 just without the premium.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf From the industry\u2019s perspective, TPCs have a downside. Increased use of TPCs reduces price transparency, fundamental to a functioning marketplace, and they reduce the need for futures hedges, diminishing liquidity.\u00a0 Both these increase market risk and with that, an increase in cost.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Background\"><\/span><b>Background<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Interest in target price contracts has increased in Western Canadian grain, oilseed and pulse markets \u2013 now to the point that the majority of grain bought in Western Canada may be on some sort of target price contract.\u00a0 Although they are a great way to park a pricing order at an attractive price so you don\u2019t need to monitor the market, there is a downside too.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">They go by different names: Viterra calls theirs a Target Price Agreement (TPA).\u00a0 Cargill\u2019s is called a Grain Pricing Order (GPO).\u00a0 Richardson calls theirs a Market Manager Contract. Paterson Grain has a Target Price Agreement (TPA).\u00a0 And so on.\u00a0 They have different names, but they all do the same thing; to make it easy, we will call them all Target Price Contracts (TPCs).<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-806\" src=\"https:\/\/welcome.combyne.ag\/resource-centre\/wp-content\/uploads\/2024\/03\/Screenshot-2024-03-15-at-11.34.17\u202fAM.png\" alt=\"\" width=\"1533\" height=\"454\" \/><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">This three part series provides a closer look at these contracts, showcasing the pros and cons and different perspectives on their use.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_Farms_Perspective\"><\/span>The Farm&#8217;s Perspective<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">There are times when farmers believe that prices could move higher over the next few weeks or months \u2013 or maybe you just hope they will \u2013 and you want to take advantage of those higher prices.\u00a0 But you\u2019re busy and don\u2019t always check the markets as closely as perhaps you should.\u00a0 It would be great if you had a way to sell your grain at the price you want \u2013 if the market moves there \u2013 without having to watch the market like a hawk.\u00a0 The TPC seems to be just what is needed.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When you enter into a TPC with a grain company, you indicate a price \u2013 above the grain company\u2019s current bid price \u2013 at which you agree to sell a specified amount of grain for a specified delivery window.\u00a0 Some contracts are open ended; they remain open until they get triggered or are cancelled \u2013 whichever comes first.\u00a0 With others, a contract termination date is specified, after which, if the target price has not been met, the agreement is void \u2013 you haven\u2019t sold anything.\u00a0 Either way, while the contract is open, there is the possibility that the buyer will accept the price and you will have a binding contract to deliver at that price, in accordance with all other terms of the contract.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s look at an example. <\/span><span style=\"font-weight: 400;\">Let\u2019s say canola prices at your local elevators are currently around $12.50\/bu and you want $14.00\/bu.\u00a0 You enter into a TPC with a grainco with a target price of $14.00\/bu.\u00a0 Over the next few weeks the market price moves around but the grainco\u2019s published price does not reach $14.00\/bu.\u00a0 However, at a point when their price is $13.50\/bu, they need to quickly buy more canola to finish loading a train that is about to be spotted.\u00a0 They look at all their outstanding TPCs with targets near the spot price and decide to accept yours (and others) for immediate delivery.\u00a0 By doing this, they are paying more than their street price bid, but they are avoiding the potential for large penalties from the railroads for late loading or shipping less than a full train.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This example shows just one reason why a company may accept your TPC; there are others.\u00a0 For example, if a grain company is negotiating a large sale, they may want to cover that sale (that is, buy the grain needed for the sale) \u2013 or a portion of it \u2013 fairly quickly.\u00a0 They may feel that once the market hears about the sale, prices will jump.\u00a0 They may accept all TPCs that are close to their current price to minimize the risk of higher prices.\u00a0 Or they may see market factors evolving that they suspect will support prices and they decide to accept TPCs as a quick way to protect themselves from these higher prices.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Perhaps it goes without saying, but if the buyer\u2019s current street bid price hits your target, you get filled \u2013 you now have a sale at that price.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"But_why_that_price\"><\/span><b>But why that price?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">I have often wondered why certain prices are chosen as targets.\u00a0 Is it a price where you are profitable?\u00a0 Is it a price that you think is at the top of the near-term price range?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For the most part, the appeal of a TPC is that it gives an avenue to a better price than today\u2019s posted street price.\u00a0 We know that, at times, accepting today\u2019s price carries with it the anxiety of potentially watching the price move higher after you have sold.\u00a0 And approaching it differently where you feel as though you have more control \u2013 or that you are not just a \u201cprice-taker\u201d \u2013 is appealing.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Those that don\u2019t like them would say that by using TPCs you run the risk of a grain buyer taking advantage of you \u2013 picking you off when the market is starting a big rally.\u00a0 They apparently don\u2019t like the idea of having a TPC trigger at $12.00\/bu as the market moves higher \u2013 perhaps much higher \u2013 to say $14.00\/bu, even though the $12.00\/bu target was set on the basis of sound analysis of your own cost structure and acceptable profitability.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">I never saw it that way.\u00a0 Hopefully, when you place an order (through a TPC) to sell at $12.00\/bu, there were sound reasons for doing that, most importantly, it was profitable.\u00a0 If you don\u2019t like the idea of selling at $12.00\/bu because the price \u201cmight\u201d go to $14.00\/bu, then your approach is more speculative than it should be.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When trading futures, it often pays to sell just below where everyone else is selling.\u00a0 Sage traders will often place their sell orders at say, $639.50\/t or $639.80\/t when there is lots for sale at $640.00\/t.\u00a0 As the market creeps higher, these orders will get filled before those at higher prices, like $640.00\/t; and even if the market gets to $640.00\/t, there is the possibility that not all offers at that price will be taken.\u00a0 The same goes for selling cash grain and using TPCs.\u00a0 If the magic number for most farmers is say, $14.00\/bu, it may make sense to go with a target of $13.80\/bu or $13.90\/bu \u2013 for the same reason as in the futures market.\u00a0 You give up a little bit but greatly improve your chances of getting filled.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"One_TPC_with_one_company_%E2%80%93_or_one_with_each_company\"><\/span><b>One TPC with one company \u2013 or one with each company?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">For the most part, farms enter into TPCs with one company.\u00a0 But entering into a TPC with just one company limits your market exposure.\u00a0\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">What happens when buyers are paying your target price but not the company you have the TPC with?\u00a0 It can happen.\u00a0 First, if you\u2019re not watching the markets closely, you could very well miss the opportunity to sell at your target. \u00a0 But, assuming you do notice, you have to decide at that time whether you still accept the target or decide you want to wait for higher prices.\u00a0 Now the issue of discipline comes in; many enter into TPCs as a way of staying disciplined and not changing their price ideas when the market gets close.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you still accept that target, you can cancel your TPC and sell your grain to another buyer.\u00a0 If you sell your grain to another buyer first, it is possible that by the time you contact the buyer you have the TPC with, they have decided to accept it \u2013 then you\u2019ve sold your grain twice.\u00a0 Best to cancel the TPC first.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Here&#8217;s where you can negotiate.\u00a0 When you call to cancel the TPC, tell them what you are doing and why.\u00a0 Give them a chance to match the other bid; they may even pay a bit more, just to keep you on their side of the tracks.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">What some farms do is enter into multiple contracts \u2013 one with each buyer they tend to sell to.\u00a0 But they are hard to manage, and you run the potential of all of your contracts getting triggered at once.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Alternatives_that_provide_similar_results\"><\/span><b>Alternatives that provide similar results<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">If farmers are using TPCs to squeeze just a little bit more out of the market, they should also consider other alternatives.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, they should check out forward prices.\u00a0 Sometimes the spot price may get close to your target but not close enough to trigger the TPC.\u00a0 At these times, it may make sense to check out the forward (deferred delivery) prices quoted around the same time.\u00a0 For example, let\u2019s say you\u2019re considering a TPC for canola with a target price of $13.50\/bu when the spot price is $13.34\/bu.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">All grain buyers provide bids on forward, or deferred delivery, contracts. When the street price is close to your target like in this example, a forward bid price for later delivery can be above your target price.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now you have a decision to make.\u00a0 You could enter a TPC with a $13.50\/bu target and hope the spot market rises enough to trigger it \u2013 or that your buyer jumps at your target for some other reason.\u00a0 Or you could simply sell your canola at $13.50\/bu (or better) with a deferred delivery contract and be done with it.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you wait to see if the market rallies to trigger your TPC, you are taking the risk that it won\u2019t.\u00a0 By locking in with a deferred delivery contract, you will have removed any further price risk while achieving the price you wanted.\u00a0 Either way, you will be waiting to deliver and get paid.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Another alternative is to write (sell) call options.\u00a0 When you enter into a TPC with a grain buyer, you are essentially selling them a call option on your cash grain but without getting a premium (and, the flip side of that is, they are essentially <\/span><span style=\"font-weight: 400;\">buying<\/span><span style=\"font-weight: 400;\"> a call option without paying a premium).\u00a0 From my perspective, you could get almost the same coverage as a TPC by writing call options with the added benefit of collecting the premium.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s use an example to compare a TPC and a short call position:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf Assume the futures are at $618.60\/t and the current basis is $30.00 under; (this makes the current market $13.35\/bu)<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf Also assume you want $620.00\/t; at $30.00 under that means futures at $650.00\/t<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-808\" src=\"https:\/\/welcome.combyne.ag\/resource-centre\/wp-content\/uploads\/2024\/03\/Screenshot-2024-03-15-at-11.34.03\u202fAM.png\" alt=\"\" width=\"1318\" height=\"988\" \/><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">This example shows how TPCs and call options are similar.\u00a0 Key differences are:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf\u00a0TPCs can be any amount; options are in discreet tonnages (eg: canola options are 20 tonnes)<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf\u00a0TPCs are available on all commodities; options are only available on those crops with futures<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf\u00a0TPCs can be at any price; options are only at set strike prices<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf TPCs can be cancelled at no cost; options usually have a premium<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u25cf\u00a0TPCs can be triggered due to a strong basis; basis has nothing to do with options<\/span><\/p>\n<p>Clearly, there are alternatives to TPCs that can be as effective \u2013 if not more \u2013 such as simple option strategies.\u00a0 Having said that, there are now TPCs on basis only; in other words, the set target is a basis, not a flat price.\u00a0 The combination of using a TPC on basis only and an option can be very effective.\u00a0 And I like the fact that it doesn\u2019t take liquidity away from the futures market.<\/p>\n<p><strong>This has been part one of the three part series on target price contracts.<\/strong><\/p>\n<p><span style=\"font-weight: 400;\">If there\u2019s more about the grain industry that you want to get a better understanding of, check out <\/span><a href=\"https:\/\/thetradingfloor.circle.so\/c\/welcome\/\"><b><i>The Trading Floor<\/i><\/b><\/a> <span style=\"font-weight: 400;\">where we provide real time market analysis along with ample background information and analysis about how our markets work.<\/span> <span style=\"font-weight: 400;\">If there\u2019s more that you want to explore, don\u2019t hesitate to contact me.<\/span><\/p>\n<p style=\"text-align: left;\"><span style=\"font-weight: 400;\">John De Pape<\/span><\/p>\n<p style=\"text-align: left;\"><b><span lang=\"EN-US\">Farmers Advanced Risk Management Co<\/span><\/b><\/p>\n<p style=\"text-align: left;\"><a href=\"mailto:thetradingfloor@depape.ca\"><span style=\"font-weight: 400;\">thetradingfloor@depape.ca<\/span><span style=\"font-weight: 400;\"><br \/>\n<\/span><\/a><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"wp-image-813 alignleft\" src=\"https:\/\/welcome.combyne.ag\/resource-centre\/wp-content\/uploads\/2024\/03\/FARMCO_LOGO06.png\" alt=\"\" width=\"153\" height=\"107\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"Target Price Contracts &#8211; Key Points \u25cf Target Price Contracts (TPCs) \u2013 also referred to by other names such as Grain Pricing Orders (GPOs) \u2013 can make life easier for farmers by reducing the need to watch markets closely.\u00a0 Used effectively, they can help get better prices.\u00a0 However, there are pitfalls to avoid, the most [&hellip;]\n","protected":false},"author":23,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[11,29,14,15,17,42,10,28,41,40],"class_list":["post-794","post","type-post","status-publish","format-standard","hentry","category-financial","tag-agriculture","tag-canadian-ag","tag-combyne","tag-crop-marketing","tag-farming","tag-grain-contracts","tag-grain-marketing","tag-market-analyst","tag-target-price-contracts","tag-targets"],"_links":{"self":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/794","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/users\/23"}],"replies":[{"embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/comments?post=794"}],"version-history":[{"count":15,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/794\/revisions"}],"predecessor-version":[{"id":819,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/794\/revisions\/819"}],"wp:attachment":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/media?parent=794"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/categories?post=794"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/tags?post=794"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}