It is a forward contract that guarantees a minimum price with an opportunity to participate in future price gains. From a farmer’s perspective, this type of contract eliminates an important risk factor, and the incentive to default on the contract is less than that with fixed-price contracts. On the other hand, the buyer can also hedge the assumed risks by taking opposite positions. The farmer can be required to pay a certain price to take advantage of this benefit. In practice, the vast majority of farmers in developing countries have no access to forward contracts that contain this kind of price risk management component.
