{"id":803,"date":"2024-03-14T17:41:16","date_gmt":"2024-03-14T17:41:16","guid":{"rendered":"https:\/\/welcome.combyne.ag\/resource-centre\/?p=803"},"modified":"2024-03-18T22:15:28","modified_gmt":"2024-03-18T22:15:28","slug":"part-iii-target-price-contracts-and-the-industrys-perspective","status":"publish","type":"post","link":"https:\/\/welcome.combyne.ag\/resource-centre\/part-iii-target-price-contracts-and-the-industrys-perspective\/","title":{"rendered":"Part III: Target Price Contracts and The Industry\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-6a09dadb05d84\" ><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-6a09dadb05d84\"  type=\"checkbox\" id=\"item-6a09dadb05d84\"><\/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-iii-target-price-contracts-and-the-industrys-perspective\/#The_Industrys_Perspective\" title=\"The Industry&#8217;s Perspective\">The Industry&#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-iii-target-price-contracts-and-the-industrys-perspective\/#Transparency\" title=\"Transparency\u00a0\">Transparency\u00a0<\/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-iii-target-price-contracts-and-the-industrys-perspective\/#Futures_liquidity\" title=\"Futures liquidity\">Futures liquidity<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"The_Industrys_Perspective\"><\/span>The Industry&#8217;s Perspective<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">I used to really like TPCs.\u00a0 I always thought \u201cit pays to advertise\u201d.\u00a0 You know, let the market know at what price you would sell.\u00a0 There have been times that some farms got say, $12.00\/bu for their canola on TPCs \u2013 but the public bid price never got that high; only those that used TPCs got that price.\u00a0 So more and more, there is a gentle push into using TPCs \u2013 sometimes the only way to get the good prices is through a TPC.\u00a0 The problem is that with increased use of TPCs, we run the risk of eroding some of the fundamentals of the marketplace \u2013 and everyone loses.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">There\u2019s a bigger picture here \u2013 beyond the individual farms and grain companies that use TPCs.\u00a0 TPCs have an impact on the industry as a whole, for the most part unnoticed.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Transparency\"><\/span><b>Transparency\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">First, the use of TPCs with target prices at levels different than the public street prices, means grain is being bought at prices that the market in general is not aware of.\u00a0 Some may say that this is not important \u2013 \u201cwhat prices I pay is nobody\u2019s business\u201d.\u00a0 And to a point, they would be right.\u00a0 But price transparency is a fundamental component of a fully functioning marketplace.\u00a0 As more grain is bought through TPCs, the public street bid becomes less indicative of the true market value.\u00a0 What good to the market is a public bid at $8.00\/bu when most of the business is going on at $9.00\/bu?\u00a0 In its extreme, all activities that use those public prices \u2013 inventory valuation, credit, crop insurance, market and risk analysis, and all marketing decisions (even by those companies using TPCs) \u2013 become less accurate and less valid with broader use of TPCs.\u00a0\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It becomes a competitive issue.\u00a0 Smaller grain companies that perhaps don\u2019t offer TPCs rely more heavily on publicly available prices to build their view of the marketplace values.\u00a0 They may make sales at prices below where the market truly is, and then struggle to buy where they see the market price is indicated publicly.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This increases the risks inherent in the business and with increased risk comes increased costs.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Futures_liquidity\"><\/span><b>Futures liquidity<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">As we mentioned earlier, TPCs provide the grain company with an automatic, built-in back stop.\u00a0 They know where they can buy a certain amount of grain they may need which reduces the need for hedging in futures.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In the normal course of business, grain companies will sell large amounts of grain at once.\u00a0 When these sales are made \u201cflat price\u201d (as opposed to selling on a basis only), there is considerable price risk; by making a flat price sale without the stocks to back it up, the grain company is now short \u2013 and maybe in a big way \u2013 and are at risk the price may rise against them.\u00a0 Conventionally, they would immediately go to the futures market and buy futures to reduce their price risk exposure.\u00a0 And, of course, when they later buy the grain at the elevator, they sell futures.\u00a0 These hedging activities are the basis of futures and provide liquidity in those markets.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, when a grain company sells grain and covers the sale with TPCs, there is no need for futures at all.\u00a0 Futures are needed when there is a time lag between selling and buying; if there is no time lag \u2013 such as when they sell and then buy using TPCs \u2013 there is no need to trade futures.\u00a0 True, the TPCs may not be triggered immediately after making the sale, but they reduce the need for futures since they provide a price back-stop, much like a call option.\u00a0 The use of TPCs runs the risk of draining the liquidity out of futures markets.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Futures are among the most effective risk mitigation tools available.\u00a0 If futures liquidity is reduced, risk increases \u2013 and that translates to higher costs.<\/span><\/p>\n<p><strong>This has been part three 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=\"180\" height=\"126\" \/><\/p>\n","protected":false},"excerpt":{"rendered":"The Industry&#8217;s Perspective I used to really like TPCs.\u00a0 I always thought \u201cit pays to advertise\u201d.\u00a0 You know, let the market know at what price you would sell.\u00a0 There have been times that some farms got say, $12.00\/bu for their canola on TPCs \u2013 but the public bid price never got that high; only those [&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":[],"class_list":["post-803","post","type-post","status-publish","format-standard","hentry","category-financial"],"_links":{"self":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/803","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=803"}],"version-history":[{"count":2,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/803\/revisions"}],"predecessor-version":[{"id":818,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/posts\/803\/revisions\/818"}],"wp:attachment":[{"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/media?parent=803"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/categories?post=803"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/welcome.combyne.ag\/resource-centre\/wp-json\/wp\/v2\/tags?post=803"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}