Cargill's Premium Average contract allows you to enhance your grain price in exchange for a firm offer to sell additional grain for deferred delivery.
The contract is customized: You choose the firm offer price and averaging period. The premium you receive depends on those factors, reports Jennifer Kazin of Cargill Risk Management .She gives this example:
Suppose the local cash bid for September delivery is $3.90. You enter a Premium Average contract to sell 10,000 bu. of corn for September delivery at $4.50. You receive 30¢/bu. over the current bid in exchange for a firm offer to deliver an additional 10,000 bu. of grain for October delivery the following crop year, if the February average for December futures (crop insurance base price) is above the $4.50 Target Futures Price. Your final cash price for your September delivered corn, regardless of the firm offer outcome, is the current $3.90 bid + 30¢ premium = $4.20.
If the February average of December futures is, say, $4.25 (below your Target Futures Price), you don't have to deliver the firm offer bushels and are free to market them.
If, on the other hand, December futures average, say, $5.20 (above your Target), the firm offer bushels cannot be repriced and you are obligated to deliver at $4.50. In this case, your Revenue Insurance guarantee would be higher than $4.50, as well, offering protection in case of crop shortfall.
(Note these examples ignore basis for simplicity.)
Cargill recommends using this contract on up to 25% of your expected production.