Convenience Versus Costs: The Ins and Outs of Delayed Payment Contracts

Your local grain buyer calls with what seems like a win-win opportunity: They want to take your grain now, while you have time to deliver it, and not charge you storage fees. Then you can price it later when prices go up. 

But, in grain marketing there are always hidden costs, says Jon Scheve, president of grain for Superior Feed Ingredients. The “free” storage being advertised by grain buyers can also be called price later opportunities, delayed pricing or DP. 

Essentially, he says, it refers to when farmers sign over their grain to an end user and then wait to price the grain later, hopefully at higher values.

“When end users offer this program, it is usually because they are having difficulty procuring enough grain to meet their immediate needs,” Scheve says. “Typically, free storage offerings spur a rush of quick-ship grain and helps end users get through a month or two of difficult origination. However, this ultimately keeps basis prices artificially lower.”

How much can basis prices be impacted? Typically, he says, prices can be suppressed 10¢ to 20¢ in an average year. That could go higher if an area faced a crop production issue. 

A HAIL MARY

To Ed Usset, agricultural economist at the University of Minnesota, DP contracts are the Hail Mary pass of grain marketing. 

“You throw it up and hope you win,” he says. “Sometimes you do win, but often the ball drops on the ground, and you go home with a loss.”

The losses come because once you deliver the grain, you are fully exposed to price risk. Also, you face institutional risk if the elevator or end user goes broke. 

“It doesn’t happen often, but it can happen,” Usset says. “You gave up title, so it is now their grain. You essentially were making an unsecured loan to that elevator.”

PROS VERSUS CONS

Farmers can see success with DP contracts in the fall if prices rally after harvest (like the past two years). Or, Usset says, he has seen them used effectively in the spring when elevators want to move grain before weight restrictions go on roads. 

If your grain is in questionable condition after harvest, having your elevator store it lessons your winter grain bin monitoring, Scheve adds. 

“These conveniences seem good on the surface; however, the farmer has limited their grain pricing opportunities,” he says. “These farmers are now committed to the prices only that end user is offering.”

Understand the risks and rewards of these contracts, Usset adds, and have an exit strategy. “Have an idea of what you’re waiting for, and be ready to price.”  

Visit AgWeb's Cash Grain Bids, where you can enter your zip code to find the cash bids and basis levels for the five elevators closest to you.