HEDGE-TO-ARRIVE CONTRACTS

Q & A - Part 2 of 2 

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. 

 

The wheat market has been going up, up, up, until just recently.  On Tuesday we watched it drop 15 cents, then up again Wednesday, and finally a big drop (up to 30 cents) today (Thursday).  This is puzzling to me since the July 12 USDA Report came out bullish.  Will this recent drop in the market affect basis?  Might this be helpful for those of us needing to set the basis prior to harvest? 

One must always pay close attention to all aspects of the USDA report, especially world stocks. In Wednesday's report they projected world stocks to be higher than a year ago. So even though we have a shorter crop in the US, high prices spur production around the world, which is why we have to take advantage of market opportunities when they materialize. On the basis side of things, demand for August stinks. The west coast expects to be awash in Montana wheat so basis levels have been falling, which essentially is telling the producer to bin the wheat and wait until the market wants it. 

Response from HTA Week Contributor: 
Futures markets move on what may happen in the future. Possible hot weather, a possible drought, some country looking for wheat and the market will rally. The futures market will move, sometimes in large increments, when more "what if's" are added to the mix. There is a lot more to the futures markets than supply and demand.

The basis is the best indicator of supply and demand. When the buyers want wheat, basis goes up. When they don't, basis will come down to the level where the buyer will step back in and buy wheat again. With the futures still at high levels, basis will continue to erode as we start the Montana harvest. Overseas and local buyers know a certain amount of grain will be delivered at harvest, whether it is contracted or on a delayed price program. Until harvest is over and we know the quality and quantity, basis won't make any large moves to the upside unless some unknown factor arises.


Would you say that basis moves inversely against futures?

As a rule, basis moves independently of futures. It is a barometer of demand.  When it narrows or gets more positive it is telling you time is passing and/or there is greater demand for the grain. If it widens or weakens, it becomes less positive and is telling you that the elevator doesn't want the grain.

Response from HTA Week Contributor: 
Normally there is a corellation. If the futures drops, the basis has to do the work. If the demand is poor and the market doesn't want it, both can travel down together until the supply stops or demand picks up.

Response from HTA Week Contributor: 
When futures markets rally, the producer will start selling wheat. For the end user to stop the onslaught of sales from the producer, they lower basis. If they didn't, they would have more grain bought than their sales or their facility can handle in a given period. Basis may move inversely at times of rapidly rising futures markets, however, if the buyers still need grain, the basis may hold steady or improve. During the rally in the futures markets this past fall and winter, basis held very steady at times and did not decline near as much at it could have with futures at these levels.

 

How have HTAs affected elevator policies for harvest delivery?

Response from HTA Week Contributor: 

Contracted grain (whether it is a HTA or cash or basis fix) has priority over delayed price grain at my facility. The producer who takes the risk of selling new crop well in advance of harvest is given priority over those who chose to do nothing. With the harvest rush sometimes it is difficult to separate the two. When it comes down to space and who can deliver, contracts come first with me.

Response from HTA Week Contributor: 
Hedged wheat is not priced until the basis is set and turns the contract into cash wheat, which is what I want to be able to sell and ship. So that my exposure is limited, hedged wheat without a set basis will be treated the same as any unpriced wheat.

 

What are the major differences to be aware of in marketing spring wheat vs. winter wheat, especially with regard to HTAs?

Response from HTA Week Contributor: 

The crop year in Kansas City (HRW) starts with July and ends with May. The crop year in Minneapolis (HRS) begins in September and runs to July. If you sell a July contract in Kansas City it would be legal to roll it to the following May. If you did this in Minneapolis you might not be able to roll out to another month. The Kansas City market has more liquidity than Minneapolis. Spring wheat is a much smaller crop, both in the US and in the world. Demand for HRS grown in only three places in the world, is somewhat more inelastic than HRW which is grown on every continent on earth. The net effect is more volatility in spring wheat markets than winter wheat markets, especially in years of tight supply. Contact your local elevator manager for basis information and other questions you may have.

 

I have contracted 10,000 bushels of HRW with my elevator through HTAs.  My protein came back at 13.5%.  How can I capture the protein premium?

Response from HTA Week Contributor:

When forward contracting several months in advance, nobody has the foresight to predict what protein premiums may be. I always do "market scales at time of delivery", unless I can get my buyer to commit to a scale, which does not happen very often. 

Response from HTA Week Contributor: 
Your elevator should pay you the premium when you haul the grain and settle up.

Response from HTA Week Contributor: 
Lock in the basis for a the specific protein you own.

 

Lessons Learned - Tips For Success with HTAs

Response from HTA Week Contributors and successful producers: 

  • If pledging your crop against an FSA loan(s), you must declare that you have signed a Hedge-to-Arrive.
  • Imagine basis as the faucet for the flow of grain.  When the exporters want more grain, they'll raise basis and turn on the faucet.  When they don't want grain, they'll shut the faucet off by dropping basis bids.
  • Follow the markets!  Montana MarketManager posts futures and basis quotes, charts, daily headlines and commentary for Montana producers.  Take advantage of the many sources that provide market analysis and advice. 
  • Use Hedge-to-Arrive contracts as one tool in your marketing toolbox.  Not all tools will work every year; spread your risk by using a combination of tools for the current market situation.  For an example of how to combine tools for risk protection, check out Marketing and Crop Insurance from the March 2006 issue of Prairie Grains magazine on tips for utlizing forward sales with CRC crop insurance.
  • With the rise to ten year highs in the futures markets, a contract is still a contract, no matter what the price is. Each party of the contract expects the other to honor and fulfill the obligations on the contract. If the markets go down, I will fulfill my obligation by paying the contract price, and if the market rallies, I still expect the contract to be delivered on at the contract price. Options strategies to protect us from a price rise, or fall, could have been implemented when the HTA was first established. However, we all have 20/20 hind sight and coulda, woulda, and shoulda ourselves to death. I'm fond of telling people if I positively knew what would happen in the grain markets, I definitely would not be here. I would be on a beach in Hawaii with a cell phone talking to a broker. And with that, I wish you all a successful and safe harvest and remind you to talk to your local elevator manager or a broker for any questions you may have.  

 

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.