Forward Purchase Agreements Offer Hemp Farmers Either Assurance or Added Benefit
By William Sumner, Hemp Content Manager, New Frontier Data
With a glut of biomass on the market facing a dearth of potential buyers, hemp farmers are looking for alternate ways to sell their crops and protect themselves from falling prices. One way for them to accomplish such is by setting up forward purchase agreements.
For the uninitiated, there are some things to keep in mind about the process.
What is a Forward Purchase Agreement?
Essentially, it is a customized contract between two parties to buy or sell a specific commodity or asset at a specified price, usually set against an industry benchmark. In the case of hemp, prices are often set against rates determined by a third party like the PanXchange hemp industry benchmark. Loosely regulated, forward purchasing agreements do not trade on centralized exchanges and are considered over-the-counter (OTC) transactions. While the agreement grants greater flexibility to buyers and sellers, a downside can be that the default risk is higher.
“This is something that mature markets do every day,” said PanXchange Founder and CEO Julie Lerner. “Trading at a fixed price is the sign of an immature market.”
Forward Purchase Agreements vs. Futures Contracts
A common mistake is to confuse forward purchasing agreements with futures contracts. Though they are very similar, there have some key differences. Forward purchasing agreements are customizable, whereas futures contracts operate as standardized contracts and are traded on exchanges like the NASDAQ. Forward purchase agreements are also settled at the end of the contract, while futures contracts are determined daily.
How a Forward Purchase Agreement Works
As example, if a cultivator expected to grow 1 million pounds of biomass within six months to sell to an extraction company, the cultivator can agree either to sell the hemp at the current industry benchmark or to sell it at whatever the price turns out to be at the end of those six months.
By agreeing to sell at the current price, cultivators protect themselves from falling prices, yet might end up selling at a lower price than what the industry benchmark is six months hence. Conversely, by agreeing to sell at the future benchmark cultivators are betting between getting either a higher or lower purchase price, depending on market conditions.
When negotiating a forward purchase agreement, each the buyer and seller often dictate certain terms affecting the price. For example, a seller with a high-quality product may want to sell their crop at a premium of the industry benchmark, whereas a buyer may request a discount to offset the cost of transportation.
How Common Are Forward Purchase Agreements?
According to Lerner, forward purchase agreements are relatively rare in the hemp industry. Since hemp prices have been relatively volatile over the past year, both buyers and sellers have been reluctant to commit. However, as hemp prices begin to stabilize, Lerner is optimistic that the practice will become more widespread, with her company at the center of it.
“It’s not an industry-wide thing yet,” Lerner explained. “We have clients and friends in the industry who are trying to promote forward contracting based on the PanXchange benchmark.”