{"id":801,"date":"2024-03-14T17:41:16","date_gmt":"2024-03-14T17:41:16","guid":{"rendered":"https:\/\/welcome.combyne.ag\/resource-centre\/?p=801"},"modified":"2024-03-19T16:51:46","modified_gmt":"2024-03-19T16:51:46","slug":"part-ii-target-price-contracts-and-the-graincos-perspective","status":"publish","type":"post","link":"https:\/\/welcome.combyne.ag\/resource-centre\/part-ii-target-price-contracts-and-the-graincos-perspective\/","title":{"rendered":"Part II: Target Price Contracts and the Grain Company\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-6a09db0f92770\" ><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-6a09db0f92770\"  type=\"checkbox\" id=\"item-6a09db0f92770\"><\/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-ii-target-price-contracts-and-the-graincos-perspective\/#The_Grain_Companys_Perspective\" title=\"The Grain Company&#8217;s Perspective\">The Grain Company&#8217;s Perspective<\/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-ii-target-price-contracts-and-the-graincos-perspective\/#Why_does_a_grain_company_trigger_TPCs_instead_of_simply_raising_its_bid_price\" title=\"Why does a grain company trigger TPCs instead of simply raising its bid price?\">Why does a grain company trigger TPCs instead of simply raising its bid price?<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"The_Grain_Companys_Perspective\"><\/span>The Grain Company&#8217;s Perspective<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Remember the example in Part I where the grain buyer is negotiating a new sale?\u00a0 It turns out that having TPCs on the books helps out more than you might think.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">First, imagine what it\u2019s like offering say 50,000 tonnes of wheat.\u00a0 You have to come up with a price that is competitive, that the buyer will hopefully accept and that will translate into a profit after all costs, including the purchase price.\u00a0 And the purchase price is a big unknown \u2013 and can change before you have bought enough to cover the sale.\u00a0 You may have uncommitted stocks in your elevator(s) that you can sell, but more often than not, you will have to go out and buy more.\u00a0 The big question is \u201cat what price can I originate enough to satisfy this sale?\u201d\u00a0 \u201cWhat price do I need to pay to get farms to sell?\u201d<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Without TPCs, the grain trader must rely on his best guess as to the price that will attract the needed grain.\u00a0 Most traders will have a pretty good sense of what that price is, simply by being active in the market, but there is still some risk that they could be wrong.\u00a0 But if the grain company has TPCs on the books, the grain trader can simply look at the book of TPCs they have and get a much clearer picture of what it will cost to supply a potential sale, with little or no risk.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Think about it; if you have 10,000 tonnes of wheat TPCs at $8.75\/bu, another 20,000 tonnes at $8.90\/bu and another 20,000 tonnes at $9.00\/bu, you know that your replacement cost is no worse than 8.91\/bu (on average) at the elevator.\u00a0 You haven\u2019t bought this wheat (yet) but you can build an offering price based on your TPCs; if you get the sale, you can start originating the needed grain by paying slight premiums over your public street bid.\u00a0 Say your street bid is $8.50\/bu; you may first raise it a bit \u2013 say to $8.60\/bu or $8.65\/bu \u2013 to see what comes in.\u00a0 Not only does this increase the potential of fresh deliveries, it also may become the best bid among the competition.\u00a0 But perhaps best of all, you are buying at prices less than what you used to build your price, so any difference is a plus.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In the event that, as time goes by, you aren\u2019t able to buy all that you need, rather than push your publicly posted price higher, you may opt to trigger the lower priced TPCs \u2013 the 5,000 tonnes at $8.50\/bu.\u00a0 And maybe you tap into the 10,000 tonnes at $8.60\/bu.\u00a0 You will go as high as you need to, to cover the sale. The publicly posted street price may never exceed 8.50 but trade was completed at higher levels.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The TPCs on the books is an effective back-stop, giving the grain company a price ceiling.\u00a0 Think of TPCs as call options for the grain company \u2013 options without paying premiums.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But beyond that, a book of TPCs gives the grain company a view to the market in general.\u00a0 It is safe to say that if they have TPCs hovering around a specific price, other grain companies will as well.\u00a0 And, by extension, you could surmise that other farms have similar price ideas.\u00a0 Knowing that there is sizeable selling interest in a particular price range gives the grain company a leg-up in how it positions itself in the market.\u00a0 Specifically, when selling overseas, they can be more aggressive sellers based on that price range paid to farms, knowing that, in the event that prices start to rally, there will be stocks available at that price.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_does_a_grain_company_trigger_TPCs_instead_of_simply_raising_its_bid_price\"><\/span><b>Why does a grain company trigger TPCs instead of simply raising its bid price?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Bid prices are market signals \u2013 raising the published bid price may send the signal that the market value of the crop has increased.\u00a0 But in reality, it may be that the grain company only has a small and immediate need \u2013 and are willing to pay slightly more for it; the general market value hasn\u2019t changed and they don\u2019t want to give the impression that it has.\u00a0 Even so, if they raise their bid price to get a small amount more into the elevator quickly, they would likely drop their price just as quickly once they buy what they need.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But there\u2019s more.\u00a0 Raising your price doesn\u2019t automatically mean you will buy more.\u00a0 In fact, a typical reaction by farmers to higher prices is to pull back on additional sales, thinking that there is more upside to come.\u00a0 In this way, raising the general bid price to get a quick injection of new deliveries can be counter productive.\u00a0 Another approach would be to simply get on the phone and call selected farms to offer a \u201cspecial\u201d or premium for immediate delivery (this happens even with TPCs in play.)\u00a0 Nonetheless, TPCs are probably the most effective tool the grain companies have to fill these gaps.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Remember, every grain company has a book of TPCs.\u00a0 Through the TPCs on their books, their view and understanding of the market is greatly enhanced.\u00a0 Not only do they have a good idea where their buying customers will opt to step in and buy, with TPCs they also know what price it will take to buy the same crop from farms.<\/span><\/p>\n<p><strong>This has been part two 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><\/a><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-813\" src=\"https:\/\/welcome.combyne.ag\/resource-centre\/wp-content\/uploads\/2024\/03\/FARMCO_LOGO06.png\" alt=\"\" width=\"174\" height=\"122\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"The Grain Company&#8217;s Perspective Remember the example in Part I where the grain buyer is negotiating a new sale?\u00a0 It turns out that having TPCs on the books helps out more than you might think.\u00a0\u00a0 First, imagine what it\u2019s like offering say 50,000 tonnes of wheat.\u00a0 You have to come up with a price that [&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":[11,29,14,44,15,17,42,10,35,43,41],"class_list":["post-801","post","type-post","status-publish","format-standard","hentry","category-financial","tag-agriculture","tag-canadian-ag","tag-combyne","tag-contracts","tag-crop-marketing","tag-farming","tag-grain-contracts","tag-grain-marketing","tag-grain-trading","tag-target-price","tag-target-price-contracts"],"_links":{"self":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/801","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=801"}],"version-history":[{"count":5,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/801\/revisions"}],"predecessor-version":[{"id":822,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/801\/revisions\/822"}],"wp:attachment":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/media?parent=801"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/categories?post=801"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/tags?post=801"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}