How HTA Contracts Are Rolled to the Next Crop Year and the Risk of Inverted Market
The market plan I recommend includes your merchandiser allowing you to roll your undelivered bushels, should you come up short on production, to the next crop year providing you take the risk of the old crop to new crop spread. That is not as dangerous as it sounds.
Usually, you gain on the roll to the next crop year, but there are years when you will lose value on the roll. Those are years when the market is “inverted”, meaning the new crop price is below the old crop price.
Here is the math when rolling a HTA contract from one crop year to the next:
Let’s say you have a $4.00 HTA in the December 2019 corn contract for 50,000 bushels and you come up 5,000 bushels short.
You tell your merchandiser to roll to the next crop year on a day when the December 2019 futures contract is at $3.54. Your merchandiser will roll to the December 2020 futures contract.
Since the merchandiser has a sold (short) position in the December 2019 futures contract, he will have to buy December 2019 corn to offset the sale at $4.00 to hedge your $4.00 HTA.
To re-establish the hedge, in the next crop year, your merchandiser will sell December 2020 corn futures at the current price.
Your merchandiser will simply:
Buy the old crop December 2019 futures and sell the December 2020 futures.
It is as simple as that.
If your merchandiser buys the old crop lower than he sells the new crop, your HTA will increase in value the price difference because he bought low and sold at a higher price.
However, some years, the merchandiser will have to buy the old crop futures at a higher price than the he sells the new crop and your HTA will decrease the price difference.
In 2019, when December 2019 corn was at $3.54, December 2020 corn that day was at $3.98.
If a $4.00 Dec 2019 HTA was rolled that day, the HTA went from $4.00 in the December 2019 to $4.44 in the December 2020 contract. A two cent roll fee would leave the 2020 HTA at $4.42, not so bad considering the original HTA price $4.00.
Make sure your merchandiser knows you will pick the day of the roll. The day of the roll will have a dramatic impact on the value of the next year’s HTA price.
The roll to the next crop year will reap the greatest gain or the smallest loss on the day old crop makes it low.
If the roll is done at the high day for the year, you will probably have a loss because the market is inverted, meaning the old crop price is higher than the new crop price.
Note the December 2019 corn and December 2020 corn spreads on two different dates during the growing season of 2019:
Date: | Dec 2019 corn: | Dec 2020 corn: |
24 June 2019 | $4.57 | $4.18 (a roll on this date = loss of 39 cents) |
8 Sept 2019 | $3.54 | $3.98 (a roll on this date = a gain of 44 cents) |
The difference in rolling at the top versus the bottom of the 2019 corn market was 83 cents a bushel!
The December 2021 corn futures went inverted (traded lower) to the new crop December on 0ctober 14th, 2020.
Note the chart:
If one had sold corn two years in advance every year the past 20 years, the average gain on the roll would have been 28 cents! One can accomplish the same gain by spreading Dec to Dec in their own futures account.
Easy money! Timing is everything! Note the twenty-year history of the corn old crop to new crop spreads at fall low of the old crop December:
You want to bear spread Dec to Dec when you think old crop has peaked.
You want to bull spread when you think old crop has bottomed.
When you price the 2022 crop of corn and beans later this spring or early summer, you need to be ready to bear spread new crop 2021 to new crop 2022. That spread will capture most, if not all of the inversion from 2021 to 2022.
If you think about this a while, it will probably begin to make sense. Remember, you want to buy low and sell high.
When is the old crop strongest relative to the new crop? At the high for the year, of course.
When is old crop the weakest relative to the new crop? At the low for the year!
Soybeans and wheat old crop to new crop relationships work the same way.
To make more profit through better marketing, you have to do some things you never did before. But make sure you understand the tools!