Review of the Basics
Montana MarketManager® is a marketing education program. 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 is a Hedge-to-Arrive contract anyway?
- How does a Hedge-to-Arrive contract differ from a forward contract?
- My neighbor told me about his success with Hedge-to-Arrive contracts, so I went to my elevator and sold one. What do I do now?
- What things should I be watching for in the market that may affect my final cash price?
- Examples of using HTAs
- How do I integrate HTAs into my marketing plan?
What is a Hedge-to-Arrive contract anyway?
Montana MarketManager has an excellent comparison of several types of grain contracts on its website. Here's what it has to say about HTAs, also known as "Futures Fixed Contracts":
FUTURES + BASIS - (FREIGHT & MARGIN) = CASH
A Hedge-to-Arrive contract allows the producer to lock in a futures price with the elevator, leaving the basis to be set at a later time. The elevator will establish a hedge in the futures on your behalf in exchange for delivery of the cash commodity at a set time. This contract is useful if futures prices are relatively high and market conditions lead you to believe that they will weaken and/or you think there is room for improvement in basis levels. A Hedge-to-Arrive contract will be written for delivery of a specific amount of grain (usually 5,000 bu lots, but some elevators may write one for a smaller amount), a specific shipment period, and the set futures price. This contract will be complete when the producer sets the basis, which will determine the cash price. The basis can be set at any time but must be set prior to delivery and while the contracted futures month is still being used by traders to calculate cash price (usually the 15th day of the month preceding contract expiration).
1. Limits downside futures price risk.
2. Can take advantage of basis improvement.
3. No margin requirements to the farmer, since the elevator is carrying the position.
4. May be allowed to buy back the contract if you are unable to deliver.
5. May be allowed to roll the contract to a later month in the same crop year.
1. Can't participate in futures rally.
2. Downside basis risk.
3. Must monitor basis levels closely to lock them in when high.
4. Locked in to the elevator and required to deliver (unless allowed to buy back the contract).
5. If grain is delivered prior to pricing basis, there may be service charges.
6. This type of contract can only be executed during trading hours (8:30 a.m. to 12:15 p.m. MST).
How does a Hedge-to-Arrive contract differ from a forward contract?
From Ed Usset, Center for Farm Financial Management in Minnesota:
If you sell wheat to your local elevator for October and you agree on a fixed price including the basis, then you have just signed a forward contract. With a "Hedge-to-Arrive" contract, you and the elevator only fix the futures price - the basis is allowed to float. If you don't like the basis implied by a forward contract bid, then a Hedge-to-Arrive allows you to play the basis, and hopefully for the better.
Well, it's important to recognize that you're not alone. Once you've entered a HTA contract, you are responsible for two things: 1) delivering the specifed quantity of grain at the specified time (month) and 2) setting the basis. Delivery options will be discussed in depth Wednesday, and you'll have lots of information to help you with the basis tomorrow.
There are numerous factors that play into the final price you'll receive for your grain. Here's a short sampling: production and quality both throughout the U.S. and in competing countries (i.e. Canada, Australia, Mexico, Ukraine), domestic and foreign (export) demand, the futures markets and basis trends, government programs, your selling mechanism (contract), your quality and production, and your ability to meet your customers' demand - both the elevator and the end user. Lucky for you, much of this information is compiled on a daily basis and available to you through Montana MarketManager.
Examples of using HTAs
Here's an example of one Great Falls producer's successful use of an HTA in 1998:
· Feb, 1998 - Started watching the deferred futures months looking for an opportunity to price in some of
the coming year's harvest
· Wrote a hedge-to-arrive contract for MWZ98 (Mpls Dec 98) at 3.99
· BIG HURDLE to sell a crop I hadn't even seeded yet.
· Fixed the basis in Nov, 1998 at -.16 cents for a net cash price of $3.83.
· Sold over fill of the contract at delivery for a cash price of $3.43.
And again in 1999:
· Oct, 1998 - Locked in MWU99 (Mpls Sep 99) at $3.85
· In Aug, 1999 the basis for 14.0 DNS hovered around -.20, so I rolled my HTA to the MWZ99 (Mpls
Dec 99) futures contract at a .14 cent carry to equal $3.99.
· At marketing club meeting in Sept, a neighbor said one elevator was offering a basis of -.04 cents for
· I locked in this basis on my HTA for a net cash price of $3.95
· Current cash price at that time was around $2.95
Marketing doesn't always turn out like we hoped. If you have a story of an HTA gone wrong, please contact us so that fellow producers will know what to avoid with these contracts.
Hedge-to-Arrive contracts are just one more tool that can be used for pre-harvest marketing. Click here for an excellent example of a 2006 Pre-Harvest Spring Wheat Marketing Plan by Ed Usset at the Center for Farm Financial Management. Ed refers to the Hedge-to-Arrive contract as "Futures Fixed".
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.