Posted by: usset001 | February 8, 2012

Hedge-to-arrive contracts in corn

I received an interesting question from a farmer in southern Minnesota. Here’s his question and my reply.

Question: I am a fairly new producer looking for a little advice. I only farm about 200 acres (mostly corn). I would like to hear your thoughts regarding basis levels for new crop corn. I would like to sell my corn right off the field, for October, but the basis is right around .65 [65 cents under the new crop December contract]. I think there is going to be a pretty decent crop this year and I think corn prices will fall by harvest time. I would be happy with the current futures price or something close to it, but I would like to do a little better with the basis. Any advice will be appreciated.

My Response: I agree with you that a basis of 65 cents under for harvest delivery is less than inspiring. Your marketing alternatives are fairly limited – let’s see if I can walk you through a few.

1. Don’t do anything and hope the basis is better by harvest. It is quite possible that the basis will be 10-20 cents better by harvest. Unfotunately, that does you little good if the futures price is $2 lower (that’s not a prediction, mind you, simply a statement of possibilities).

2. Sell a futures contract. With 200 acres of corn, you will be fortunate to produce 4,000 bushels – not enough to cover the standard 5,000 bushel contract. There are mini-contracts available but I’m not certain you want to go through the hassle of managing a margin account to price 200 acres of corn.

3. Try a hedge-to-arrive contract. A HTA contract allows you to lock in the board price with your local elevator and set the basis later. This might be your answer. Ask your elevator if they do HTA contracts. Ask for terms re cost and delivery time.

Please keep in mind that you probably do not want to contract 100% of your expected production. 70-75% would be fairly aggressive.


Responses

  1. If this guy cannot produce more than 4,000 bushels of corn on 200 acres, he better quit now. He won’t pay for his seed with a 20 bushel yield. Did you do your arithmatic right?

    • Okay, so we have an economist who can’t do math. 200 x 175 (day) = 35000 or seven contracts.

      • He must work for Obama.

  2. As said above, there’s funny math here. In addition, 200 acres is more than enough to start a structured, non-emotional futures hedging program.

  3. I would also look around a bit for better bids. Our local ethanol plant now has a 40 cent basis. End users such as ethanol plants or feed mills may be willing to pay better to be assured corn to keep the grinders going. For 25 cents you can haul that grain a bit further.

    • That 40 cents is for October delivery, other months are lower. They are at 38 cents basis for November and 35 cents for December.

  4. Do a HTA contract. Lock in a profitable futures level and see how harvest goes. If we have a huge harvest you can find cheap storage and capture carry. If weather becomes an issue when the combines are rolling set basis and deliver. Harvest basis is not favorable as the market is flooded with grain, but if the market crashes relative to today’s price and your concerned about your unsold grain buy puts

  5. Geez, poor Ed makes a decimal error, and gets a can of grief opened for him. I wish I only made mistakes that small……..

    Before the OP can set a plan, he really should ask himself what is realistic. If in his area the fall basis last 5-7 years is -.65 or more, then I don’t think I would gamble on a narrowing basis. Not right now. All indicators today are whopping corn acres, trend line yield will make bin space and harvest freight capacity tight, which leads to a wide basis. But if normal fall basis in his ‘hood is .45 or less, then do an HTA and gain the money.

    Ed has made some good points in the past about preferring straight futures vs HTA, and I would agree, EXCEPT, if the OP has a situation like mine, where I have a local grain outlet with a good buyer, who will help walk through the HTA, spreads, options, etc. It’s might be worth it to use them vs. a broker doing contracts. Learn and then go do futures straight up in a year or two.


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