Forward Contracts Bring Certainty, But at a Cost for Grain Growers

Forward selling is a useful tool for grain growers to manage price risk, but it comes with its own set of risks. By locking in a sale at an agreed price before harvest, growers can remove some uncertainty around revenue, particularly when prices are favorable. However, the contract does not guarantee production, and growers still face the risk of producing enough grain, meeting quality specifications, and delivering it within the agreed period.

Consider a grower who sells 500 tonnes of wheat forward at $A320 per tonne. In a good season, they may harvest 550 tonnes, deliver the contracted 500 tonnes, and have another 50 tonnes available to sell. But if production falls short, the grower will face a shortfall and potential losses.

The washout is a key risk associated with forward selling. If the contract price is higher than the market price at delivery, the grower may be on the hook for the difference. For example, if wheat is sold at $A350 per tonne but only fetches $A400 per tonne at delivery, the farmer would lose $A50 per tonne.

Quality can also cause problems. If the contract requires a specific grade of wheat and the grain fails to meet that specification, the grower may not be able to fulfill the contract.