The Cash Plus Contract offers a set premium to an existing corn or soybeans contract in exchange for a commitment to offer the same quantity and quality, at a specific target price on a specific date.
Under this contract, the producer receives an additional premium, minus a service fee, above that local cash market for grain. In return, the producer guarantees the same quantity and quality of grain for later delivery if/when the Chicago Board of Trade (CBOPT) closes at or above the target price on a specific date.
Outlined here are three possible outcomes using an example situation: On March 1, cash corn is bid $3.25 for March delivery at the local elevator. Under the Cash Plus Contract, a producer receives a $0.24 per bushel premium, minus the service fee, in exchange for a commitment to sell the same quantity and quality of bushels for later delivery at a maximum price ($4.10 futures price in this example). With a $4.10 December corn option, the following outcomes could be realized.
If December futures are above $4.10 on option expiration, the producer must sell new crop at the $4.10 futures price, minus the local cash basis – which can be priced out any time prior to expiration and/or delivery.
If December futures are below $4.10 on option expiration, the producer is not obligated to deliver new crop. The producer’s obligation to delver is cancelled unless basis has already been priced. Once basis has been established, grain has been sold regardless of the futures level.
If December futures are at or above $4.10 before option expiration, but drop below $4.10 on that date, the producer is not obligated to deliver new crop. This outcome, however, leaves uncertainty as to whether or not new crop is priced and may mean a missed marketing opportunity for the producer.
