Minimum Price Contract

DEFINITION of 'Minimum Price Contract'

A forward contract with a provision that guarantees a minimum price at delivery of the underlying agricultural commodity. A minimum price contract enables a seller to specify a minimum price for an agricultural commodity, such as grain, while still being able to take advantage of price increases in the event the market rallies. The minimum price contract specifies the quantity, minimum price and delivery period for the particular commodity, as well as the time period during which the seller has the opportunity to take advantage of rising market prices.

BREAKING DOWN 'Minimum Price Contract'

Minimum price contracts can be advantageous to sellers because the risk of price decline is removed, a minimum price is guaranteed and the seller is still able to profit from price rallies during the specified time period. Disadvantages of minimum price contracts include the inability to trade in and out of markets, since delivery is expected, and the associated premium incurred by the seller that can result in lower prices than the seller may have received if the commodity had been sold under a standard contract.