Posted by: usset001 | November 4, 2011

Hedge-to-arrive vs. futures contracts

I took an interesting question via email yesterday. I thought I would share the question and my response.

Question for Ed: I was just reading your article in latest issue of Corn & Soybean Digest, “I AM A BASIS BULL.”  I am a beginning farmer. My cousin and I just cash rented XXX acres for our first venture. From your article, I can say that what you are doing is HTA [hedge-to-arrive] contracts. I did an HTA for fall of 2012. I sold at $6.05 and for a $.10 premium, I locked in the futures and left the basis open. Where I’m at the basis is currently $.60, I look for history to repeat and have the basis narrow by next summer. After reading your article, do you recommend contracts different than that, or is HTAs what you use? I told my cousin that every sale we make for a profit is one more sale that keeps use farming another year.  Do you offer any marketing advice since you’re a University employee, or do you charge for your thoughts?  from Nebraska

Answer: Thank you for your interest. I feel your pain – the price decline from September 1st to early October was the largest decline ever in the new-crop corn contract (for the month of September).

I want to clarify one point. If your HTA calls for delivery of new-crop corn at harvest in 2012, the basis you get will reflect the market for NEW CROP delivery in the fall. If the spot basis reaches 20 cents over the July next June, that is interesting but your basis will reflect the market for harvest delivery, which may be something between 40-80 cents under the December contract. My point here is that we need to distinguish between the basis for spot delivery, and the basis for new crop delivery. Just because your elevator is bidding 20 cents over the July for June delivery of corn, does not mean they are obligated to offer you the same cash price for corn delivered at harvest, 4 months later.

That said, a hedge-to-arrive contract is a pretty good way to play a stronger basis. The best way (and this takes nerve and a solid relationship with your banker) is with the direct sales of futures contracts. Futures are better than an HTA because an HTA locks you into delivery with the party on the other side of the transaction, and that party is not obligated to match the basis bids in nearby markets. For example, it is possible that next fall you will see that an ethanol plant 20 miles down the road is bidding 25 cents under for corn. And 15 miles the other way, there may be a hog operation bidding 20 cents under. Your elevator may continue to bid 45 cents under and, because that is who you have your HTA contract with, that is the basis you get.

Futures contracts expose you to margin calls (and anxiety), but they also offer you “free agent” status in terms of final product delivery. I like free agent status because that lets me find the best basis in my area. Free agents can do very well – just keep your eye on the baseball signings over the next two weeks.

I charge nothing for the advice, but I am told that you get what you pay for (I think I just insulted myself).

Good luck and please let me know how it all works out when you unwind and deliver on the contract.

p.s. And you can tell your cousin that I like your approach to pricing corn. Got a profit? Get something done.  Ed

 


Responses

  1. […] Usset, Edward. “Hedge-to-arrive vs. Futures Contracts.” Eds World Grain Marketing. WordP… […]

  2. […] 1. Title: Hedge-to-arrive vs. futures contracts […]


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