How a Cash Forward Contract Works
You agree with an elevator, processor, or other buyer to sell, for example, 20,000 bushels of number 2 yellow corn for delivery in November at a stated price. That price is the futures reference price plus or minus the local basis at the time you sign. Nothing changes hands until delivery. There is no margin account, no mark-to-market, and no margin calls along the way. When the delivery period arrives, you haul the grain and get paid the contracted price regardless of where the market sits. If corn is a dollar higher at delivery, that dollar belongs to the buyer; if it is a dollar lower, the contract is what saves you.
What to Check Before You Sign
- Quantity and tolerance: what happens if you come up short on bushels? Some contracts require you to buy out the shortfall at market price.
- Grade and discounts: know the quality specs and the discount schedule for moisture, damage, or foreign material.
- Delivery window and point: which weeks, and which location? Hauling farther than planned eats into the price.
- The buyer's credit: a forward contract is only as good as the party paying. Ask about their financial standing, and know what protections your state's grain indemnity or bonding rules provide.
- Act-of-God clauses: some contracts excuse delivery shortfalls from verified production disasters; many do not. Know which you are signing.
Strengths and Limits
The strengths are simplicity, no margin calls, and a price you can plan around. The limits are just as real: you give up any upside if the market rallies, you must deliver even if your crop is short, and you carry counterparty risk that an exchange-traded futures hedge does not have. Many growers forward contract only a portion of expected production for exactly those reasons, and add to that portion as the crop becomes more certain through the season. A reasonable pattern is a modest share priced at planting, more after pollination, and the rest once the crop is in the bin. Whatever share you choose, write it down before the season starts so the decision survives contact with a moving market. Futures trading involves substantial risk of loss and is not suitable for all investors.