Ed’s World

Questions & Answers About Grain Marketing

What are hedge-to-arrive contracts, and what’s it mean to “roll a hedge forward?”

Question: I have a “dumb question” – I don’t know the definition of “hedge-to-arrive contract.” If I sell corn to my local elevator for next July and we agree on a fixed price including the basis, is this a futures contract or a hedge-to-arrive contract?  Secondly, you mention rolling over December HTA contracts – were these CBOT future contracts or firm fixed contracts with an elevator, etc. If a person “rolls over” contracts, does that mean he sells the one he has while purchasing a new one?

Ed replies: If you sell corn to your local elevator for next July 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.

Most elevators that offer HTA contracts will allow you to roll your hedge forward once within the same marketing year. You would not be allowed to roll a July delivery HTA into the next crop year, but you would be able to roll an October delivery HTA into a spring delivery. If you choose to roll your HTA hedge forward, the profit or loss in the contract is also rolled forward.

Let me give you an example to illustrate the mechanics of “rolling” a hedge forward. Let’s assume you had entered into an HTA contract last spring with December corn futures at $2.50 per bushel (good sale!). At harvest time we find the December contract trading at $2.00, and the July contract trading at $2.30 per bushel. A large carry like this calls for a storage hedge, where you hold your crop in storage and sell the carry by locking in the July contract. When you ask your elevator to roll the hedge forward, they will take the 50 cent profit in the December contract and roll it forward into the new contract using the July futures price as the base - your new hedge-to-arrive contract will note a July price of $2.80 per bushel ($2.30 current price plus 50 cent profit in the December contract).

Not all elevators offer HTA contracts and, of those that do offer them, not all of them allow you to roll a hedge forward. Talk to your local elevator to see what types of contracts they offer.

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 .