Hayenga, Wayne A.

Parks, Don L.

English

Texas A&M University

L-1144
FORWARD CONTRACTING-SELLING CROPS BEFORE HARVEST
\A'ayne A. Hayenga and Don L. Parks*
"Contract your crop - fix your price before
harvest and eliminate some price risk" is becom-
ing a common phrase throughou t rural Texas as
agricultural prices show more fluctuation. For-
ward contracting of crops is a financial tool, a
marketing tool and a management tool that re-
moves some of the uncertainty from farming.
This fact sheet identifies legal components of
an enforceable contract, explains some advantages
and disadvantages of forward contracting and gives
items for consideration before entering into a for-
ward contract.
Legal Components
A contract is an agreement, enforceable in
court, between two or more persons for a sufficient
consideration to do a specific act. A typical for-
ward contract for an agricultural crop is a written
agreement made before the crop is harvested for
the producer to deliver a crop at a specified time,
place and price to the buyer.
The following are five requirements for a legal-
ly enforceable contract for agricultural crops:
• date the contract was made and signed.
• price of the product or a formula indicating
how price will be determined.
• delivery conditions specifying product identi-
fication, quality standards, quantity, place and
date of delivery. The date is commonly estab-
lished as "on or before (date)" to give producers
some choice in delivery. If the exact quality prod-
uct i not delivered, include a price benefit and
discount schedule in the contract. Where possible,
identify quality by a standard grading system. For
example, cotton could· be identified by grade,
micronaire and staple. Quantity should also be
specified, uch as 400,000 pounds of grain at 11
percent or less moisture rather than 100 acres of
grain sorghum.
*Extension economist-agribusiness and Extension economist-
management, Texas A&M University.
10.14
• specific performance expected of buyers and
sellers. Include penalties for failure to meet con-
tractual arrangements, such as conditions for for-
feiture of any escrow payment.
• signatures of the persons involved.
Meeting these requirements will help overcome
the two largest problems in forward contracting
agricultural crops: buyers not taking delivery at
a prearranged payment rate and sellers not deliver-
ing the stipulated product quantity or quality.
Verbal contracts are also legal obligations, but
written contracts help prevent misunderstandings.
Advantages
Forward contracting offers several advantages
to farmers.
Less financial risk. Because the price of the
product to farmers is fixed, buyers must bear the
risk of market price fluctuations.
Greate1· financial leverage. A fixed product
price may allow farmers to borrow more operating
capital. Lending institutions often are more will-
ing to extend loans to farmers who have a guar-
anteed price for their product. This factor be-
comes more important as the size of farming opera-
tions increases.
Financial planning. Producers who have part
of their crops sold at a fixed price can use this
information to plan the next year's capital expendi-
tures.
Disadvantages
Disadvantages of forward contracting filU t also
be considered.
Limited p1-ofit. Any increase in product market
price above the contract price benefits purchasers
rather than producers since the contract fixe the
price.
Quality may suffer. Unless product quality
standards are emphasized in the contract, farmers
may concentrate on quantity produced rather than
product quality improvement.
T Univ r ty Ie Itural 'on S r ic • Joh . Hutc ison, Dir ctor tati n
Quantity stipulations. Producers who sign con-
tracts with a stipulated quantity (such as 400,000
pounds of sorghum) must deliver that quantity. If
production is below the quantity contracted, sellers
must arrange to purchase other grain to meet the
contract arrangements or be prepared to pay a
penalty.
Legal fees. Attorney fees for reviewing or writ-
ing contracts may be an added expense.
Other Considerations
Consider several other factors before entering
into a forward contract for your crops.
Emotional contingencies. As a producer, are
you willing to live with the established price? How
much will you worry if prices go above the con-
tract price?
Buyer's financial strength. Do you know if the
buyer has the financial resources to meet his con-
tractual obligation? Checking the buyer's credit
rnay be necessary.
Producer's financial strength. If you have a
short crop, can you purchase the necessary product
to meet your contractual delivery obligations? In
light of this, some producers only contract for part
of their expected production.
Futw'e price expectations. Predicting prices for
any product is difficult, but the long time span be-
tween contracting and delivery of a crop makes
price predictions for forward contracting even
more difficul t. Chances for accuracy decrease as
the time period increases.
Producer's financial status. Will entering into
a forward contract allow you benefits of greater
leverage and better financial planning? Some fi-
nancially sound producers may not realize these
advantages.
This fact sheet is written for educational purposes and is
not it/tended as any form of legal service. Only attorneys
should be contacted for legal advice.
Educatiollal prograllls conducted by the Texas Agricultural Extensiot/ Service serve people of all ages regardless of socio-economic
levels, race, color, sex, religion or national origin.
Cooperative Extension Work in Agriculture and Home Economics, Texas A&M University and the United States Department of
Agricullurc cooperating. Distributed in furtherance of the Acts of Congress of May 8, 1914, as amended, and June 30, 1914.
8M-4-73 AECO 7


Forward Contracting--Selling Crops Before Harvest.

https://oaktrust.library.tamu.edu/bitstream/1969.1/165478/2/1144/Leaf1144.pdf

Forward Contracting--Selling Crops Before Harvest.

Abstract

Similar works

Full text

Available Versions

Texas A&M University