What a Cash Forward Contract Actually Is
A cash forward contract is a private agreement between you and a buyer — usually your local elevator, ethanol plant, or processor — to deliver a set number of bushels, of a set grade, during a set delivery window, at a set price. Nothing trades on an exchange. There is no daily settlement and no margin account. You shake hands, sign the contract, and owe the bushels.
That simplicity is exactly why forward contracting has been the backbone of farm marketing for generations. But the same features that make it simple also create the trade-offs below.
The Pros
- Price certainty. You know your price before the combine rolls, which makes cash-flow planning and loan conversations far easier.
- No margin calls. Unlike a futures hedge, a forward contract never generates a margin call when the market moves against you. There is no daily settlement at all.
- No brokerage account needed. The elevator handles the paper. You do not need a trading account, and there are no commissions in the brokerage sense.
- Quantity flexibility. You can contract odd lots — 3,700 bushels, not just 5,000-bushel futures increments.
The Cons — and How to Manage Them
- Delivery is an obligation, not an option. If the crop fails, you still owe the bushels or must buy out of the contract, sometimes at a painful price.
- You give up the upside. If the market rallies after you sign, you watch it go by. Some producers pair forward contracts with call options to keep some upside alive.
- Counterparty risk. The contract is only as good as the buyer. Elevator failures are rare but real, and unpriced or forward-contracted grain is usually an unsecured claim.
- Basis is locked too. You fix both futures and basis, so you cannot improve a weak basis later.
The practical answer for most operations is not either-or. Forward contract a portion you are confident you can deliver, and use other tools for the rest. If you want price protection without any delivery obligation, a futures or options hedge through a broker-assisted account is worth understanding before you decide. Futures trading involves substantial risk of loss and is not suitable for all investors.