Take a wheat farm in Australia that expects to harvest 2,500 tonnes and has already fixed the price of 2,250. If the harvest comes in 20 percent short, 250 tonnes promised at a fixed price do not exist. Each A$50 per tonne between the fixed price and the day’s price then costs the farm A$12,500. To know the farm’s position before that happens, list every committed sale on one sheet. Add up the rows with a fixed price and subtract that total from the crop you expect. At the foot of the sheet goes one name: who may commit the farm to the next sale, and up to what volume.
That is the commitment sheet: one page with one row for each sale the farm has agreed to, whatever form the deal took. A forward contract with the co-op, grain traded for fertilizer, a futures account the broker keeps, and a deal agreed on the phone that nobody wrote down each live in a different place. Whoever takes the buyer’s next call has none of those places in front of them.
Is a committed load the same as a priced load?
Often it is not, and the price column is where the sheet earns its keep. The Bolsa de Comercio de Rosario, Argentina’s main grain exchange, mapped five marketing years of wheat sales. Among contracts for later delivery, 29 percent were negotiated with the price still to be fixed, against 64 percent closed at a price already agreed. The wheat was committed; the price was not.
A price still to be fixed needs a reference price, the published quote the contract will use to set the price later. Of those Argentine contracts, 47 percent named the daily price published by the country’s grain arbitration chambers, and 42 percent recorded no reference at all, a gap the exchange itself points out.
A row whose formula names no reference price still has no price, and anyone reading the contracts in a hurry will count it as priced. So the price column carries two states: priced, and committed but not yet priced. Mark each row with one of them.
Write the price state on every row today, before the next buyer calls.
What does every commitment record?
A handful of details, the same ones that official definitions in the United States and Brazil already list. The United States Department of Agriculture defines a marketing contract as one that sets a market outlet, a quantity to be delivered, and a price or a pricing formula. The farmer still owns the crop.
Brazil wrote a similar list into federal law for its farm delivery note, the Cédula de Produto Rural. The note must carry the delivery or maturity date and the plain promise to deliver the product with its quality and quantity specifications. It must also state the place and conditions of delivery, the date and place of issue, and the name and signature of the issuer. The seven columns below come from those two lists; none of them was invented for this article.
| Column | What it answers |
|---|---|
| Product | Which crop, class or category the commitment is for |
| Volume | How much was committed |
| Unit | Tonnes, bushels, head, pounds, whichever the contract uses |
| Price or pricing formula | The price, or the rule that will set it later |
| Date agreed | The day the farm became committed |
| Delivery or settlement date | The day it comes due |
| Who signed | The name of the person who committed the farm |
Grain delivered into a co-op pool is the row most often left off. The farm has committed it, but the price is whatever the pool ends up with, and people file it with the co-op papers, such as a co-op membership record, rather than with sales. One row per commitment, whatever the form, is the only way the rows add up to one number.
Fill in one row for each deal, starting with the one nobody wrote down.
How much is still open, and what does a short harvest cost?
Add up the volume column, write expected production underneath, and subtract twice, because the two price states give two answers. Expected production minus every committed row is the volume not yet committed to anyone. Expected production minus only the rows with a fixed price is the volume that still needs a price.
Take expected production from the plan the farm already uses, not from a fresh guess made for this sheet. If you keep a multi-year production plan, the plan another article here lays out for what each field or herd should produce over the next three years, use its figure. If there is no plan, write down the estimate and who made it.
The costly mistake is committing more than the farm will harvest. The same Department of Agriculture report lists, among the drawbacks of a marketing contract, that the contracted quantity must be delivered, which leaves the grower open to costly yield risk. Whatever the farm does not harvest usually has to be bought at the day’s price.
Two things stand out. The priced volume alone is 250 tonnes larger than the harvest, and the 150 tonnes committed without a price come on top of it, to be delivered at a price nobody has set yet.
Prices can move more than the person carrying the volume expects. Cruz Júnior and four co-authors published a study in a Brazilian rural economics journal. They surveyed 90 corn farmers in southern and central-western Brazil in October and November 2008 about where they expected prices to go. Of the 81 whose answers could be compared with the futures market, 62 expected a narrower price range than the market had actually shown. Measured against the price history of their own regions instead, 44.4% of them still expected too narrow a range.
The group was not a random draw. It was 90 farmers who agreed to answer, so the size of the gap belongs to those two months of 2008. What carries over is the pattern: the open volume is exposed to wider swings than the person carrying it expects.
Any row priced below the farm’s lowest acceptable price, the break-even figure another article here shows how to work out, is a loss already contracted. Whether locking in the price now is worth what it costs is a separate question, which another article here takes apart. The articles on selling in this library say what to write down, never what to sign.
Run the two subtractions on your own sheet, then try a harvest 20 percent below your plan.
Who can sign the next commitment?
One named person, up to a stated volume. The offer to add another commitment comes from the buyer, and it can come at any time. The buyer calls whoever picks up.
Write the authority line at the foot of the sheet: this person may commit up to this volume without asking anyone, and above it a second person signs too. A limit above the volume not yet committed to anyone lets one phone call sell tonnes the farm does not expect to have. In the example, that volume is 100 tonnes.
If the farm keeps a written job description for each person, the same limit belongs there. Deciding who may commit the farm, and how far, is a basic piece of farm management: it turns a list of deals into a limit that one person answers for.
Write the name and the limit on the sheet, and date it.
Where to start
An hour and a half, with the contracts and the brokerage statements on the table. Nothing new is decided here. All of it has already happened; it has simply never been in one place.
A commitment on this sheet is not yet a sale. It becomes one on the day the product ships and the money settles, and the row then moves to the record of sales made against the written selling plan. Until then it is an obligation the farm carries.