Check Into Rolling or Deferring Soybean HTA Contract

On soybean hedge to arrive contracts scheduled for ’07 fall delivery, if the basis continues to be extremely weak, consider requesting a change in the delivery date, perhaps next June, adjusting the new HTA price for any gains or losses in the current contract and expenses on the original HTA that the elevator may incur.

But request with the understanding that a contract is a contract.  The elevator manager is under no obligation to change the contract, and may not even be able to – the elevator may already transportation commitments lined up and will need delivery of that grain.

“See if you can get delivery deferred, realizing you may incur some penalties.  Some elevators might be able to do it, and some can’t, depending on delivery and transportation commitments of the elevator. All you can do is ask,” says George Flaskerud, NDSU Extension economist.

Deferring delivery of a HTA contract is often referred to as “rolling” it to another delivery month.  An HTA contract allows the producer to lock in a futures price with the local elevator, leaving the basis to be set at a later date. The elevator will establish a hedge in the futures on your behalf in exchange for delivery of the cash commodity at a set time.

The contract is written for delivery of a specific amount of grain (usually 5,000 bushels per contract, but some elevators may offer smaller volume amounts), at a specified deliver date, and a set futures market price. The contract will be completed when the producer sets the basis, which will determine the cash price. The basis can be set at any time but must be set prior to delivery and while the contracted futures month is still being used by traders to calculate cash price (typically by the 15th day of the month preceding contract expiration).

Most but not all elevators offer HTA contracts that allow you to roll your hedge forward within the same crop year (for example, you roll an HTA written with the Dec 2007 corn futures contract to the March, May, or July 2008 contracts, but not to the following December - the next crop year). Some elevators will allow you to roll your hedge more than once, but again, within the same crop year. They may charge you a modest fee for rolling forward. Or you may be locked into the contract and required to deliver with no exceptions, unless allowed to buy back the contract. Check with your local market for the exact terms of your current HTA contract, and about terms of future contracts.

Elevators that offer HTA contracts may allow you to roll your hedge forward. If your contract allows you to roll forward, then consider rolling your HTA, if doing so makes sense. The purpose of rolling the hedge is to buy time – time for the basis to improve and give you a better price.

This is how it works, says Ed Usset, grain marketing specialist for the Center for Farm Financial Management at the University of Minnesota. First, the scenario:

• You’ve used an HTA contract in the spring to establish a December 2007 corn futures price of $2.95.
• Your elevator will allow you to roll an HTA forward at no charge.
• Your delivery date is set for harvest time (mid-October).
• At harvest, December 2007 futures are trading at $3.05, and July 2008 futures are trading at $3.24 (this 19 cent “carry” in the market at harvest would be considered very normal in the corn market).
• You have storage on the farm to hold your grain.
• The harvest corn basis is 50 cents under the December. This is a harsh harvest basis, and your judgment says that the basis will be much better by spring so you decide to ‘roll your hedge’ forward to the July contract.

You go to your elevator and express your desire to roll the hedge to the July contract. They will write a new contract using the July contract as the pricing base. What happens to your 10 cent ‘loss’ in the December contract (sold at $2.95 in the spring, now trading at $3.05)? The loss is taken out of the July futures price, so instead of an HTA with July futures at the current market of $3.24 July, the contract will be written with the July contract at $3.14 ($3.24 actual adjusted for the 10 cent loss in the December).

You will also negotiate a new delivery date at the same time. If your new delivery date is set for first-half June, and the basis improves to 38 under the July at that time, your final price for the corn will be $2.76 ($3.14 July futures base - $0.38 basis).

If December futures are much lower at harvest, then your gain on the December futures price will be added to your July futures price at the time you roll the hedge forward.

The decision to roll your hedge forward will be guided by the carry in the market and your basis expectations for later in the crop year. In the example used here, there was an attractive carry in the corn market at harvest (19 cent from December to July), and a weak harvest basis. Your decision may be different if the carry is small and the basis is strong - in this case you may find it better to just deliver the grain at harvest.