Narrowing the Basis in a Forward Contract

Question: I got a copy of your presentation notes for “Grain Marketing 101: A Primer on Pricing Your Grain.” Today I checked the local elevator and fall contract prices. I was quoted $5.50 for beans and $2.17 for corn for fall delivery. Those are basis levels of 69 and 40 cents under, respectively. How can I narrow the basis in a forward contract? What is a hedge to arrive contract?

Ed replies: You have no way of narrowing the basis in your favor. It is set in a competitive way according to the needs of your elevator. Your only choice is to check other nearby elevators for a better bid, hope your elevator raises their bid, or explore the use of an HTA contract.

With an HTA (hedge-to-arrive) contract (aka futures fixed contract, aka “basis not established” or BNE contract) you lock in a futures price while deferring the lock on your basis to some later date. The original intent of the HTA contract was to serve as a hybrid contract that featured some of the better aspects of a simple forward contract and selling futures directly. Like a forward contract, an HTA contract often allows you to contract an odd bushel amount (e.g. 3,700 bushels and not 5,000 bushels) and they usually carry no fees. Like selling futures directly, the HTA gives you control over the timing of your basis decision.

Most, but not all, Minnesota elevators offer their customers HTA contracts. The fact that you are not familiar with the tool makes me wonder if your elevator is one of those that doesn’t.

By the way, at the basis levels you are being offered on soybeans, I greatly prefer the use of HTA contracts to price new crop grain. I can’t predict basis levels at harvest but I expect something better (possibly 20 cents better) than the 69 under for soybeans. A bid of 40 under for corn looks very reasonable at this time (as of early March).  

Usset is grain marketing specialist for the University of Minnesota Center for Farm Financial Management.  See other questions and answers about grain marketing at “Ed’s World” online: www.cffm.umn.edu/publications/edsworld.aspx. Email your own grain marketing question to Usset at usset001@umn.edu.  Usset also formulates model marketing plans and simulated sales for corn, wheat and soybeans.  His pre-harvest plans for 2006 (PDFs) can be found online at www.cffm.umn.edu/publications/mktplans.aspx.