Daily Floor Plus: A Great Strategy for a Range-Bound Market

Thursday, February 26, 2015

A “Game-Changing” Tool Captures Above-Market Price Now

Do you think new crop futures are range-bound, and are nervous you’ll miss any run-up? Do you want to start selling this year’s crop at a profitable price point, and get on with a hundred other tasks for the new crop year?

Daily Floor Plus (DFP) helps manage those problems. This unique contracting tool, popular across the U.S. on all types of farms the past two years, is ideal in a market that’s trading in a narrow range, say Cargill’s risk management experts.

“Daily Floor Plus is a game-changing marketing tool in a range-bound market,” says Clay Edwards, a Cargill Strategic Marketing Specialist. “In today’s environment, with tighter supply and demand and increasing stocks-to-usage, this contract allows a farmer to pick up a premium in a range-bound market while limiting your downside.”

In a nutshell, DFP lets you sell new crop bushels above current futures markets with the added protection of a floor. All provided you’re willing to sell a like amount of grain to Cargill if the market exceeds your target price point.

The Mechanics: You’re in Control

A critical benefit of Daily Floor Plus is that it lets you get a jump on what you’ve identified as your profitable price, rather than waiting for the market to hit it.

By working with your Cargill Farm Marketer, you can answer three basic questions that will help you structure an effective Daily Floor Plus contract:

  1. How low do you think the market will go?  This is your “Trigger Price”. Make sure to account for where your crop insurance payments would take effect and set a trigger above that number.
  2. What level would you like to protect?  Think about your likely breakeven level and where you would like to establish a “floor price” relative to that level.
  3. At what price would you like to make your next sale? This sets your “Plus Price” that your contract will start pricing at on Day #1.

By smartly structuring your contract, you are able to protect your breakeven and still participate in upside that comes at little-to-no cost to you.  

“A lot of farmers are telling us that they want to sell grain at a $4.30 to $4.50 level,” says Edwards. “We have the ability to start pricing there today, rather than a farmer taking the risk and waiting for the market to get to $4.50.”

Easy as 1, 2, 3

To help you spread your risk, an equal amount of bushels is priced over each day of your Daily Floor Plus contract. This means that once your contract is started and your Plus, Floor and Trigger prices are established, there are three scenarios that can take place:

  • Scenario #1 (represented by the gold line above): Range-bound market. If the market never hits your Trigger price during the contracting window and closes between your Trigger and Plus Price, all your bushels are priced at the Plus price ($4.35 in the example). In this scenario you only deliver your original quantity of bushels.
  • Scenario #2 (represented by the red line above): Market hits your Trigger price. If at any point during your contract window the markets hit your Trigger price, every day up until then is priced at your Plus price ($4.35 in the example) and all remaining days are automatically priced out at your Floor price ($4.00 in the example). In this scenario you only deliver your original quantity of bushels.
  • Scenario #3 (represented by the green line above): Market closes above Plus price. If on the last day of your contract the market closes above your Plus price ($4.35 in the example), all your bushels are priced at the Plus price. In this scenario, you  deliver your original contract quantity plus a like number of bushels sold at the Plus price, as part of your contingent offer.

A skeptic might say that, with the contingent offer, Cargill gets twice the amount of grain at below-market prices. But Edwards says pricing a good amount of your unsold grain at a price you’ve established to be profitable is a strong strategy.

Edwards also stresses that Cargill recommends limiting your total DFP commitment to a total of about 10% or so of your crop as part of an overall well diversified and balanced approach to marketing your grain.

Simplifying the Moving Parts

Don’t let the moving parts deter you. Daily Floor Plus is simply a tool that helps you manage your crop in a range-bound market by allowing you to sell at a level above current futures prices.

To see if a Daily Floor Plus contract is right for you, contact your Cargill Farm Marketer and run some scenarios today! To see case studies and better understand the contract mechanics, download our PDF, or watch a short video to learn more about this contract.

Figure your Plus point, and start earning it now!