Premium Price Contract

Risk- Moderate, the producer is rewarded in the nearby months, but obligated to additional bushels in the new crop year.

Reward- Cash premium in the front month.

Use when:

You understand your cost of production for future bushels and feel confident establishing an appropriate target price for delivery of future bushels. 

• It provides an elevated cash price today and can be crafted with a variety of future offers and premium values
• There is no obligation to deliver more grain unless the Future Offer is reached.
• You retain the Premium even if the Future Offer is not triggered

Example:

On March 15, you enter into a Premium Price contract to sell 10,000 bushels of March delivered corn. You receive a $0.30 premium above the current bid in exchange for your contingent offer to sell 10,000 bushels of grain for October delivery using a September 17 pricing date, and a $4.75 December contingent offer futures price.

The Market closes at 4.60 on Sept 17^th, you retain the premium and the obligation for future bushels disappears.  However, If the market closes at 4.75 on Sept 17, your future offer is converted to a Future Sale at 4.60, effectively missing out on the additional 15 cents of future upside. However, the 30-cent premium in the present sale more than compensated for the missed 15 cent opportunity.