Jon Scheve with weekly market commentary made on November 17, 2023
Brazil’s weather caused some excitement in the bean market this week. One day forecasts showed no rain, and the next it did. Until late January, farmers should expect South America’s weather forecasts to have a big impact on prices.
Unfortunately, corn hit a new calendar low this week at $4.61. While Brazil weather issues could still help corn prices, the estimated 2+ billion-bushel carryout will be hard to overcome without a big increase in export demand.
Hedging Grain - Using Futures in a Hedge Account Verses HTAs
I am often asked why I hedge my grain using a futures account instead of using HTA (Hedge To Arrive) contracts with an end user. Following are some of the pros and cons.
Setting Up a Futures Hedging Account
This is a one time “hoop” hedgers using futures must do that selling an HTA does not require. Including a hedge line with a bank to finance the hedge account is also a good idea. I will discuss this more next week.
Cost to Finance a Hedge Account vs HTA Fees
To compare HTA fees to the costs associated with selling through a hedge account, let’s assume you are holding your grain from now until July, or for 8 months. While HTA fees can vary, for an 8-month time period the cost would probably average around 4 cents per bushel based upon conversations I have had with farmers who have been using them.
Selling a futures contract in a hedge account has several costs:
Initial Margin Maintenance
This is the amount I am required to have in my hedge account to sell a grain contract. Note, I get this money back when I set my basis and establish a cash price with an end user and exit my hedge position sometime in the future.
This cost is set by the CME group. It fluctuates with the value of the commodity, and it seems to run around 8% of the value of the underlying commodity. Today’s value was $1,725 per corn futures contract. I usually budget $2,000 per contract. This is equivalent to 40 cents per bushel on a 5,000-bushel contract ($2,000 / 5,000 bushels in a contract = 40 cents per bushel).
Since I get all this money back when I exit the position, I only need to factor the cost to borrow this money from my bank for the duration I hold the position. Assuming a $2,000 initial margin cost, at a 9% interest rate, it costs me 0.3 cents per month to maintain a contract in my account (40 cents x 9% / 12 months). So, if I deliver my grain in July after 8 months, it will cost 2.4 cents per bushel in interest on the initial margin portion.
Broker Commissions
To sell a contract and buy it back averages around 1 cent per bushel with a broker.
Margin Call – Maybe
This is money I may need to move into my hedge account if the market rallies above my short/sold position. Basically, I will owe “penny for penny” the difference in my hedge account.
Large margin calls don’t happen all the time, but if one does occur, much like the initial margin maintenance above, I will be able to offset all the margin call money when I sell the grain for cash and buy back my short/sold position.
It is challenging to plan for margin calls, because no one knows how high prices will go. Therefore, I usually budget for a realistic 50-cent rally post-harvest, while also knowing a $1 rally is possible during the summer.
Like initial margin maintenance, the actual cost would only be the interest from my bank on the hedge line loan for the margin call. Assuming a 50-cent margin call at 9% interest / 12 months, the monthly cost would be 0.4 cents.
If a big margin call happens, it will probably only last a short time. So, over the 8 months from now until July, a 50-cent rally at some point during that time would likely only cost 0 to 3 cents total, depending on the duration of the rally. For example, 4 months of a 50-cent margin call x .4 cost on interest per month = 1.6 cents.
Contrary to what most farmers think, margin calls are just fine and a part of doing business. They indicate that prices rallied. The bigger the margin call, the bigger the rally. Next week I will detail how margin calls work, why I am not scared of them, and why my bank likes them as much as I do.
To recap, following is the cost to have my grain hedged in my account until July:
Initial Margin Maintenance: 2.4 cents
Commissions: 1 cent
Margin Call – Maybe: 0-3 cents
Total Cost: 3.4 – 6 cents
Basically, the cost to use a hedge account is very similar to selling with an HTA.
Flexibility – Not Locked into Any End User
The two main reasons why I do not like HTAs:
I don’t want to be locked into using one end user.
I don’t want end users to know my positions in the market.
I never know which end user will have the best bid in the future. If I use an HTA contract, my grain is locked with that end user, and I am totally dependent on the basis value that grain buyer decides to post. I have lost all my negotiation power and my hands are tied, which could easily mean 10 cents per bushel of missed opportunity, and in some years even more.
But My Local Merchant Lets Me Take My HTA Grain Wherever I Want
Some grain buyers have this option, but these types of HTA contracts tend to have higher fees. Plus, if the grain is not taken to one of their select locations, there can be additional fees.
Personally, I would think that if an HTA contract has low or zero fees AND complete flexibility in marketing the grain, how is that buyer making money? Their costs to run an HTA is likely similar to my cost to run a hedge account. So, why would a buyer be giving something away for free?
Flexibility – Move Sales Between Months
I also want the flexibility to move futures sales between months at any time. For instance, I may initially roll my hedges and plan to deliver my grain against the July contract. However, what if there is a problem with the quality of my stored grain and I need to move my corn earlier? Perhaps snow blew into my bin in late spring and my grain is getting hot, so I need to move it.
With a hedge account, I can easily do that and only worry about the spreads between contract months and brokerage commissions. Some HTA buyers have penalties to change contracts to an earlier date, on top of those same spread differences. Some HTA buyers only allow a seller to roll the contracts one time. I don’t want to be forced to play by someone else’s rules.
HTAs May Be Unavailable
In the past, during fast moving markets, some buyers have limited the use of HTAs. For instance, in summer 2012 some grain companies stopped offering HTA contracts for several days, which put some farmers in a bind. Those with futures accounts, could still sell their grain whenever they wanted.
Bottom Line
I want to have full control of my grain sales. The minor cost to carry my own hedge account is almost always offset with better basis values and improved negotiating power. If I make just 3 cents more than my expenses to carry my own hedge on 100,000 bushels verses the holder of an HTA contract, that means an extra $3,000 in my pocket. If I can make 10-cents more, which happens more often than HTA contract holder realize, that is a lot of money to add to my bottom line.
I encourage farmers to consider all the benefits of using their own hedge, and trade grain like most buyers do. Almost no major grain buyers to my knowledge are using HTAs to hedge their own grain. They are most likely using hedge accounts and futures as I describe above.
If you would like to learn more about how I use futures to hedge my grain instead of using HTA contracts, reach out to me.
Jon Scheve
Superior Feed Ingredients, LLC
9358 Oak Ave
Waconia, MN 55387