Grain Contracting Strategies: The Case of Durum Wheat (Summary)
One of the impacts of higher prices along with greater volatility in futures, basis and spreads is that there is pressure for greater use of cash contracts for grain. Indeed there has been growth in contracting for a number of competing crops in recent years. There is a wide array of cash contracts with varying terms that pose major strategic alternatives for buyers and the marketing system, particularly as buyers seek to use contracting as an element of risk mitigation. Durum is a crop where many of these issues and challenges are apparent. Durum is more risky than competing crops. There is greater price and yield risk as well as quality risk, and in contrast to competing crops, futures do not exist, cross hedging is poor and forward contracting has been used minimally. There are three purposes of this paper: First, we provide a survey of contract terms used in grain contracting with growers. Second, we illustrate some issues in contracting of some of the specialty grains (durum) in the upper Midwest. Finally, we develop a model to analyze alternative contracting strategies in the case of durum. We introduce alternative pricing features, as well as explore other alternatives and analyze them in terms of risk and return to growers.
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