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Why Use a HTA Contract Instead of a Forward Contract?

There are two grain markets.

The futures market is the measure of the world supply and demand and the basis is the measure of local supply and demand. As a grain producer you want to price both of these markets near the top of their annual price range.

These two markets move inversely of each other. Almost always, when basis is weak, futures price is strong. When the basis firm, the futures price is weak. Thus, if one separates the day the basis is locked-in from the day the futures price is locked-in, an extra 10 to 40 cents a bushel will be earned every year of every bushels and it costs nothing! The basis can be set first or the futures price can be set first.

A forward contract locks-in the basis and the futures the same day. That will cost you 10 to 40 cents a bushel.

Furthermore, the basis is a function of a delivery date and delivery location because basis is the measure of local supply and demand for a specific location and date. When the basis is set, it costs money to change the delivery date, sometimes a lot of money to change it. For the most part, merchandisers will not change the delivery date once the basis is set.

A Hedge to Arrive Contract (HTA) locks in the futures price just like a forward contract, but does not lock in the basis. Therefore, the delivery period is not locked and it can be moved forward or backward by rolling the futures to capture a firmer basis and/or the carry (return to storage) of the market.

Right now, there are two cents of carry in the corn futures from December to July, about the same in the wheat from July to March, and the bean market is inverted. The market is going to charge you to store you store your own new crop soybeans!

Therefore, if you are thinking to lock-in the futures when the carry is non-existent, always do the selling (futures or HTA) in the first new crop month (July wheat, November beans and December corn). It is likely the market will build carry into the market by harvest and the return to storage is an opportunity to make maybe 5 to 20 cents. Right now, March corn is 3 cents above December corn. If we have a normal crop, this fall, March corn will be 10 to 14 cents premium to December and July corn will be 15 to 25 cents premium to December. If you have bins, roll from December to March, capture 7+ cents (or July for 20 cents) of carry by storing your corn. If the carry is not there, your bins will make you more money empty.

Many merchandisers will let you roll a HTA to the next crop year if you have an unexpected crop problem. No chance to do that with a forward contract.

Merchandisers do not like HTA contracts, especially the older duffers still in the merchandising business. Why? Basis appreciation and capturing the carry are major profit centers for them. When you do an HTA, those pennies per bushels go into your bank account.

To learn more about carry, HTA, forward contracts, basis, etc. go to:


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