Let's Get Technical
Montana MarketManager® is a marketing education program for grain producers. Producers are strongly encouraged to visit with their grain merchandiser or elevator manager in regards to the specific grain contract(s) which currently exist or will exist in the future, and to fully understand the obligations and implications of any contract before authorizing with your signature. Please read our disclaimer.
- What if my production falls short and I can't deliver on my Hedge-to-Arrive?
- Can you get out of a Hedge-to-Arrive if the market keeps going up? Even if you have the grain?
Question from Big Sandy producer
- What is rolling and how does it work?
- Why would I consider rolling a HTA contract?
- Why does every elevator differ on rolling contracts and/or buying them back?
Question from Kremlin producer
- What is legal and what isn't? What can be learned from the 1996 "crisis"?
Realizing that each elevator has its own policies, your options may be somewhat limited. If you find yourself in this position, your best bet is to call your elevator manager and let him know right away. The relationship with your elevator manager may come into play, depending on the situation. Here are some options you may have:
- You may be able to buy back your contract from the elevator which may or may not be profitable depending which direction the futures moved. If the value of your futures contract has risen, you will pay the elevator the difference. If the value of your futures contract has fallen, the elevator will pay you the difference. You may incur a penalty to compensate for the elevator's time to replace your grain.
- You could purchase grain from someone else to deliver, and fulfill your original contract.
- Re-read your HTA contract. If your grain elevator's policy allows it, you may be able to enter into a separately negotiated contract that would allow you roll it (postpone delivery) into the next crop year.
- Note: This situation is designed to alleviate the pressure from producers who cannot meet their contract obligation. The worst case scenario for the elevator would be if they rolled a contract and then had the producer turn around and sell the grain on the cash market for a better price. This may sound like a good idea in the short run, but it will eventually erode your important relationship with your elevator manager. Read more about rolling contracts below.
- If you've already set the basis on your contract, it is likely that your elevator has already re-sold the grain to an exporter or end-user. You can either a) purchase grain from someone else and have it delivered to fulfill your contract (same as above), b) buy it back from the elevator and pay a penalty fee to offset the elevator's costs in buying back and rehedging the grain.
Response from HTA Week Contributor:
- I consider a HTA as a cash contract, with the producer setting the basis and delivering the grain. If a producer wants to be moving in and out of contracts, he should get a broker, set up an account, provide that account with margin money, and make trades with his broker. At the end of the year, the producer can take his profit or loss from his futures trades, add or subtract them from the cash sales of his grain throughout the year to come up with his final cash price for that crop year.
Some elevators will allow a HTA contract to be rolled from one month to another, delaying the delivery and the reference futures contract month into the future, i.e. Sep KC to Dec KC. If there is a carry in the market from one futures month to the next, i.e. Dec KC is a higher price than Sep KC, then your HTA contract price will be increased by the amount of the carry. When contemplating this action, remember that there is a hidden cost to you of storing your grain for the additional time period. For example, if you figure your storage costs at .04 cents per month, then it will only be advantageous to you to roll a Sep KC HTA to a Dec KC HTA if the carry is greater than .12 cents. Check with your elevator for more details.
Ed Usset's article on How Does a Rolled Contract Work? describes the mechanics clearly, if you can see past the corn. Iowa State University focuses on the different types of rolling contracts in Understanding Risk in Hedge-to-Arrive Contracts, © 1999.
You might consider rolling a HTA contract if one of the following is true:
1. The basis for your contract month is at a low level and you have expectations of a higher basis later in
2. The carry from one futures month to the next exceeds your costs to store the grain for that period of time.
Every elevator has their own guidelines by which they operate. Consult your local elevator manager with any questions you may have.
- CFTC Response to the National Grain and Feed Association (NGFA) regarding cash grain contracts
- Complete 1996 CFTC Statement of Policy and Guidance Relating to "Hedge-to-Arrive" Contracts, or visit //www.cftc.gov/
- Legal Issues Involving Cash Forward Contracts, Kansas State University, © 1999.
- Hedge to Arrive - Redux - This June 2006 article from Feed & Grain Magazine recalls mistakes made in 1996, and offers some suggestions for avoiding a similar situation this year. Note: The article is directed to merchandisers more than producers.
Disclaimer: Montana MarketManager® is a marketing education program for grain producers. It is not a marketing advisory or brokerage service. The content herein is intended solely for informative purposes and is not to be construed, under any circumstances by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.