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East of Broken Bow | I'm no great marketer, but here is my best guess as to how it works:
End user to elevator: I'm going to need a bunch of grain. I know the bushels I need, and I will need the physical delivered in a month or two. Looking out 2 months I see prices are up 25 cents.
Grain elevator to end user: I'll see what I can do to source you some grain. In the meantime, hedge your uses to protect yourself in the futures market
End user: OK
Grain elevator to producer: We are offering free DP until September. If you look at our price list, 2 months out grain is 25 cents higher. You can deliver it today, and sell it in 2 months with no storage costs.
Producer to elevator: Cool, here's some grain.
Grain elevator to end user: OK, I got enough grain sourced for you. You have the hedge so futures price doesn't matter, and as to the 25 cent carry, we'll just widen the basis 25 cents, and split the difference with you, and we can both cash in on it. Heck, we can widen the basis 30 cents, and come out even better!
Producer to himself 2 months later: I put my grain into DP, and even though the price on the board went up, I'm actually getting less for my grain. Why didn't I just contract it for the extra 25 cents, and just leave it in my bin another 60 days??? | |
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DP from end user perspective
