In an attempt to secure supply a recent response from grain traders and merchants to the low world prices is to offer and promote to grain growers No Price Established (NPE) contracts. As with any contract there has to be something in it for the seller, and also something for the buyer. Lets have a quick overview looking from both sides.
It is important to note that NPE contracts come under many different guises including Fast Cash from Agfarm, and Market Advantage from AWB.
- Benefits for the seller.
The grower who is considering NPE contracts clearly has the view that they would rather fix the price of this year’s crop later in 2017; their expectation is that grain prices will improve post-harvest. Of course, almost all producers need cash at harvest; bills build up over the growing season and its prudent to pay them down as soon as possible.
The NPE contract provides the seller with a percentage of the harvest value of the crop when delivered to store. This is essentially a loan, or a finance facility against the grain or oil seed.
Usually the NPE contract will stipulate the time when the grain has to be sold, often this is 6 months after harvest.
So, a good result for the seller, cash to pay bills but able to delay final pricing hoping for a market rally.
- What’s in it for the buyer?
The buyer is able to get into their system grain that otherwise may be sitting in storage available to any other trader to get their hands on. An alternative for growers who want to hold grain is to store either on farm or in the system and sell later. These sales could be to any trader or through any broker; an NPE contract secures the sale of the grain to the buyer (or brokerage to the broker) offering the NPE.
It also provides them with ongoing contact with the seller. During the year, the buyer has a reason to call up to discuss the current prices. A well-executed NPE contract will build relationships between sellers and buyers/brokers.
- Perks & pitfalls of NPE contracts.
The advance provided through the NPE contract attracts an interest component, this is usually explained upfront but can be embedded in the final price – the bottom line is that there is no free money.
On the positive side, accessing an NPE will mean that the seller will have an “Account Manager” who will be available to advise on market moves and outlook up to the point the grain has been sold.
Care needs to be taken that the NPE contract doesn’t limit the number of buyers you can eventually sell to. Some contracts only allow only the NPE contract offeror to bid on grain, this can be a problem if later in the year there are better prices around from other buyers. The seller should only use an NPE contract that allows access to a wide range of buyers/bids when the time comes to sell.
Some contracts also provide the opportunity to place Good till Cancelled (GTC) orders to sell. This means you can set your target price and if its reached them the grain is automatically sold. GTC’s are good because you then don’t need to be watching the market every day looking for opportunities. The negative is that on a big spike or rally the grain will be sold, and further upside value can be missed.
The 5 things about NPE grain contracts you must know:
- Know the fees and charges to be applied – nothing is for free and it’s better to know upfront than get a surprise later
- Check whether you will still pay storage and handling fees until the contract is priced
- Be sure you can access all the grain bids you want when you decide to sell
- Know by what date the grain must be sold – if you haven’t sold by the close out date the NPE offeror will provide a price
- Have a marketing plan after taking out the NPE contract
If you are unsure of the value and terms of the contract, you can always contact Mecardo and we will be happy to provide assistance.
To learn more about when to sell and when to hold, go to a recent article published on Mecardo titled Should you hold grain post-harvest?
Mecardo has also previously explained another strategy for growers wishing to remain exposed to the grain market and at the same time have the cash from your harvest in the bank. You can read more about the"Cash and Call" strategy below: