WEST LAFAYETTE — Grain buyers and elevator operators, like producers, can't afford to take all the risk and some have stopped offering cash forward contracts to price new crop corn, soybeans and wheat, said a Purdue University agricultural economist.

Since wet spring weather is delaying the start of Midwest corn planting, Chris Hurt expects to see some good pricing opportunities early this spring for corn and said farmers need to be thinking about new crop pricing alternatives.

Hurt explains the three primary pricing strategies a broker may outline when pricing 2008 crops.

The first is a simple futures hedge, which involves selling futures as an alternative to a cash contract with the elevator. For example, Hurt said a producer could sell December corn futures for $6 a bushel and lock in that futures price. The disadvantage is that producers must deposit a margin and meet margin calls if necessary, and do not know the final basis.

"Margins are like a security deposit," Hurt said. "It's not a cost, it's just a deposit to assure a producer's performance to the broker and the market. It's money that must be deposited and maintained to keep the financial integrity of the contract."

The value of the futures contract is updated daily and all accounts are brought to a zero balance, which is called "Mark to the Market."

"So if corn prices rise to $7, the producer has to deposit an additional $1 per bushel of margin, which is maintained through the brokerage firm," Hurt said. "On the flipside, if prices were to drop from the original $6 down to $5, the producer would receive $1 per bushel of credit in their margin account."

Thus, a producer is obligated to pay for an increase in price or receive benefits from a decrease in price.

The advantage, compared to a cash contract at the elevator, is that a decision can be made later as to which elevator has the best bids, Hurt said. In addition, the basis or range of sale prices is not established until a decision is made on which location to sell to, which means the producer takes a risk.

"Elevators that are still offering new-crop cash contracts have very wide basis bids," he said. "This may be an advantage of using futures through a broker if those current wide basis bids improve by the fall."

The second alternative is to buy put options. Buying put options establishes the right to receive a minimum futures price, but leaves the opportunity for futures price improvement in place, Hurt said.

"This establishes a floor for future prices, but farmers still have the opportunity to receive higher prices if futures move up," he said. "The primary disadvantage is that producers have to pay a premium to reduce one's downside price risk, while leaving the upside price opportunity in place. Brokers will be able to discuss various levels of downside price protection and outline the costs of this type of strategy."

For example, December futures for new crop corn is at $6. A producer would establish a floor at $6 in the futures market by purchasing a $6 put, Hurt said.

A put is the guaranteed right to sell at that price without the obligation. "So if prices go up to $7 or $8 they can sell at the higher price," Hurt explained. "If prices were to decrease to $5.50, the producer can still sell at $6 futures because that floor was established."

The disadvantage to this option is that a premium must be paid to get that guaranteed price. "It's like insurance," Hurt said. "The premium is based on the risk in the markets just like car insurance is based on the risk of the driver. The third strategy is called "fencing."