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Corn+Soybean Digest

Don't Be Afraid Of Hedge-To-Arrive

Mention hedge-to-arrive (HTA) marketing and many growers immediately search for an antacid. To them, horror stories of mismanaged HTAs could rival a passage by Stephen King.

But if used conservatively, HTAs could easily boost corn and possibly soybean prices as the 2000 harvest approaches. HTAs may even help growers leverage against low prices for their 2001 crops.

In late fall, using December 2000 corn futures, a western Corn Belt grower could enter into an HTA contract and lock in a $2.40-range futures price. He then would wait to set his basis when it narrows to a level that can add further to a final cash price (see table). Any early year rallies could easily send December futures to $2.70, opening the door for a stronger price. Also, December 2001 futures were at $2.60 in October, giving growers a further option for distant marketing.

"HTA could offer a good marketing opportunity for either 2000 or 2001 corn," says Glenn Johnson, an ag marketing consultant and owner of Financial Investor Services in Grand Island, NE. "If we see December 2000 futures at $2.70, a grower could lock in that price, then probably make an extra 25 cents/bu by setting the basis when it narrows to 30 cents or even 15 cents (from 40 cents before the '99 harvest) in the summer or at this year's harvest.

"Traditionally, our basis will reach its most attractive level the Friday before Thanksgiving," says Johnson. "That has varied the past two years because of high grain stocks. But there should be a time in which growers can set a reasonably attractive basis that can work well with an HTA."

Chris Hurt, Purdue University grain marketing specialist, says an HTA could be a sound tool for marketing 2000 or beyond corn - and possibly soybeans, too. With normal yields, corn production this year will be similar to 1999's production of about 9.5 billion bushels, he says.

"That means carryover stocks are basically unchanged and that prices for the 2000 crop will be similar to those seen for '99," he says. "December 2000 corn, given normal weather this year, should trade near $2 at harvesttime."

That would put cash prices in the $1.50-1.75 range, depending on the local basis level.

So, with December 2000 futures at 40 cents or more higher than December '99 futures, there's an opportunity to lock in a better price with HTAs or other marketing tools, says Hurt.

Johnson and Hurt recommend a non-roll HTA. It's one of several types of HTAs, and definitely the least risky. A grower sets the futures price, then waits to set the basis when he chooses. The elevator covers the position by selling futures contracts and is exposed to margin calls if prices move in an adverse direction. The producer carries the basis risk and the elevator carries the market risk.

Multiyear rolling HTAs, the ones that got many growers into financial trouble in 1995 and '96, should be avoided, stresses Johnson.

"Growers should not make the same mistakes that crippled hundreds of growers several years ago," he says. "They need to deliver in the year of the contract." Unfortunately, some Midwestern state and federal court dockets featured farmers, not your normal felons. Some growers were sued by grain handlers for not delivering grain during the contract delivery period. Sky-high corn prices were much more attractive than the contracted prices, so some sought contract loopholes. The scenes even brought about Congressional hearings in attempts to control the multiyear marketing problems.

"When used in a wide-basis or high-price market, HTAs have been, and should continue to be, good marketing tools," says Johnson.

"I prefer to lock in a market price, whether it's an HTA or other program, when there is a wide basis," he adds. "With a wide basis, usually only two things can happen - the futures price goes down or the cash price goes up to narrow the basis. When the basis narrows, it's better to lock it in, because you'll probably see cash prices deteriorate."

Hurt points out that, even though a grower is not faced with margin calls in an HTA, he should read what margin calls to the elevator mean.

"They are signals that the position is working against you, and you might want to consider the source of the margin calls and what you need to do about them," he says. "HTAs can be a good strategy, but the bottom line on HTAs is that the farmer must know and remember he is short December 2000 futures, and that his financial outcome will vary with those prices." ?

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