Negotiating Forward Contracts for Organic Commodities

When trading in the Organic commodities market, there are a few fundamentals that are inescapable.

The first, is that the higher price premiums for Organic commodities. are also more likely to be subject to greater storage and transportation costs, as well as seasonality and volatility, some of which can be caused by higher insurance costs and interest rate costs (for storage), greater transportation distances and less grain handling infrastructure, and seasonal grain surpluses (or shortages).

The second fundamental of Organic commodity trading, is that demand has historically exceeded supply. Along with increased demand for the organic food seen in grocery stores, much of the growth in the demand for Organic commodities has been for organic feed grains. The demand for Organic feed is so high, that the dairy and poultry operations (the largest consumers of Organic feed) routinely source imported Organic feed grains to meet their needs.

Both spot and forward contracts are used to facilitate buying and selling of organic grains. As a general guide, contracts for organic feed are more commonly spot contracts, while contracts for organic food grade grains are often forward contracts.

Negotiating a Fair Price

Buyers and sellers of Organic crops have opposing pricing interests (buying low vs selling high), and negotiating a fair price is made difficult by uncertainties of the market, and the aforementioned volatility. Mercaris helps buyers and sellers enter into forward contracts in two ways:

  • Accurate, objective market price information to base contracts off of;
  • Online auction platform to match buyers and sellers, communicate contract specifications and find a fair market price for both spot and forward grain contracts.

Mercaris enables clear communication, risk management, and ensures prompt payment upon delivery/fulfillment of an organic grain contract.

Some models for forward contract price setting:

  • Negotiation between buyer and seller to set the price, based on the current spot price, or allowing for a fixed profit margin for the grower based on his/her costs (cost-plus);
  • Periodic automatic adjustment of agreed-upon prices according to predetermined criteria such as local grain prices or ratios to end products.
  • Use of previous year’s price data, such as average spot price by region.

Mercaris market information assists in all of these scenarios, by providing prices, price indices, or price histories.

Ultimately, a “fair” price is one that makes sense by the numbers, (Mercaris Organic Grain Index™, etc.), but a “fair” price is also one feels fair to both parties. Negotiating a fair price is essential for doing future business with a supplier of Organic commodities, so consider the value of future business when approaching the final price for a sale.

Negotiating Unforeseen Circumstances

Forward contracts are supposed to protect buyers and sellers from some of the volatility of the Organic market, but these contracts can’t protect from everything.

When unforeseen problems spring up, (low supply/crop yield, damage to Organic grain order during storage or in transit, unforeseen storage/handling costs, etc.), maintaining a professional relationship with otherwise consistent business partners dis important. In cases where the parties cannot come to an agreement, contracts entered into through the Mercaris platform may rely on the rules of the National Grain & Feed Association (NGFA) to arbitrate disputes.

The organics market is small, and it is important not to underestimate the value of ending buyer-seller relationships on a positive note.