Make it Grain

We often hear from producers wanting to know more about Basis Fixed and Hedge-to-Arrive Contracts. These questions may come from young producers who are new to marketing or seasoned customers who have never used them. To shed some light on them we’ll explain them below.

Basis Fixed Contracts

On basis fixed contracts, a particular basis level is set as well as the delivery period, quantity of bushels, and futures month, while the futures price is left open-to be set later. At MRGA our contracts read that futures must be priced at least 10 days prior to the first notice day of the underlying futures month, or the contract will be at risk of rolling. When rolling, the contract is subject to the spread of the futures month specified on the contract and the next futures month traded as well as an administrative fee. The difference, made up of the spread and fee, will then be assessed to the basis on the contract and it will be adjusted as such. Basis fixed contracts should be used when the basis level posted is desirable but the producer feels there is potential for improvement in the futures market.

Benefits of Basis Fixed Contracts include:

• The producer can haul to the elevator as opposed to storing grain on the farm and have to manage quality.

• Downside basis risk is eliminated.

• The bushels incur no storage costs.

• An advance can be issued at 70% of the value of the grain.

• Allows for more time in the market as a result of rolling.

Risks and Disadvantages include:

• The producer is at risk of downside movement in the futures market. As such any difference in the value of the grain and advance taken would need to be paid back.

• Full payment for the grain is not made until a later date when the futures are priced.

Hedge-to-Arrive Contracts

Hedge-to-arrive (HTA) contracts, often referred to as “futures fixed,” allow the producer to lock in a favorable futures price while leaving the basis portion open to be set later. The producer can then set the basis at any point prior to delivery, or the basis is set to the posted bid automatically when the delivery month arrives or when the contract is delivered against. With an HTA contract the elevator places a futures hedge on your behalf and assumes all market risk. The reason the elevator charges an HTA fee is that they are then responsible for any and all maintenance margin calls. Like basis fixed contracts, HTA contracts may be rolled for the spread and fee. In this case the futures price would be adjusted. HTA contracts should be used when the futures market is at a desirable level, but the producer feels there is potential for basis improvement.

Benefits of HTA Contracts include:

• Downside futures risk is eliminated

• Allows for basis improvement.

• No margin requirements to the producer, as the elevator assumes the risk.

• Allows for more time in the market as a result of rolling.

Risks and Disadvantages include:

• Producers must watch basis levels closely.

• Producers are open to downside basis risk.

• Unable to participate in a futures rally should one occur.

GRAIN TEAM

Kim Bender, Grain Merchandiser/ Office Manager

Tanner McDaniel, Grain Originator