HTA (Hedge to Arrive) Contract (Futures Fixed) (Basis Later)

1 HTA (Hedge to Arrive) Contract (Futures fixed ) ( basis Later) With a forward cash Contract the elevator sells to an offering party (another elevator or grain terminal) at a specified cash price. With a HTA Contract the elevator sells the futures market leaving the basis open or un-established. Futures price is fixed basis in not fixed The basis must be established before or upon delivery of the commodity. This usually occurs before first notice day if delivery is not made prior to that time. When establishing a HTA Contract you have the same delivery obligation as a cash Contract .

2 Most elevators have a charge for non-delivery or breech of Contract unless it is due to an act of God. In that case most will allow you to forego delivery with no penalty, if the current price is equal to or less than the Contract price. Others may charge up to 10 cents for non-delivery as they assumed they would receive their standard handling charge if the grain was delivered. Corn Futures: (HTA) $ $ basis : (Average 40) $ .55 $.

3 40 Cash Price: $ $ Potential gain of $ by waiting to set basis . Example: It is May and you wish to Contract corn for harvest delivery. Current forward pricing bid for harvest delivery is: $ Current futures price for December corn is: $ basis is: $ Normal basis is $ You have the choice of cash contracting at a basis you know is 20 cents wider than normal or you could Contract your corn with the elevator using a December HTA at $ If you Contract your corn using a December HTA Contract .

4 You could possibly pick up an additional 20 cents per bushel if the basis narrowed before harvest. Keep in mind the basis could also widen. That is a risk you take but with a basis that is 20 cents wider than average already (for corn), chances of it widening further are minimal. Typically you want to establish the basis by late August as basis usually widens coming into harvest for corn and soybeans. Contract corn using a December HTA in May $ By mid summer, basis narrows to: $ Established cash price after fixing basis at 40 is: $ By using a HTA Contract in the above scenario, you netted 20 cents per bushel more than if you would have cash contracted in May at $ Example #2: It is currently May and you know the market is approaching levels you wish to sell at.

5 December corn on May 2, closed at $ Cash bids for harvest delivery are at $ There is a monthly supply/demand report scheduled to be released on the morning of May 3. You feel the report will be friendly and prices could possibly go 12 cents higher the next day. On the morning of May 3, your thoughts are confirmed. The report is friendly and corn is called to open sharply higher. You can choose between two ways of placing a sell order at your elevator, 1) inform the elevator personnel you want to establish a cash Contract for harvest delivery corn if they get a bid of: $ 2) inform the elevator personnel you want to establish a HTA Contract if December corn reaches.

6 $ In the first hour of trade, December corn futures trade at $ per bushel but the elevators best bid for a cash forward Contract is $ The occurred because the terminals widened the basis to protect themselves in the event the price of corn fell before they could re-sell the corn to someone else. If you had chosen option #1, you would not have sold any corn on May 3rd. If you had placed the sell order using option #2 you would have contracted corn at $ minus the basis when established. This scenario took place 2 to 3 times during the spring and summer of 1998.

7 Pros and Cons of Hedge to Arrive Contracts: A HTA Contract is used when the basis is abnormally wide and historically it should narrow before or during the designated delivery period. HTA contracts should be used in a volatile market when basis can widen without warning and you wish to sell at a specific price. Establish a HTA Contract for a delivery period in which you can fulfill your obligation. In other words, if you wish to establish a futures price for harvest delivery corn, always use the December Contract .

8 Don t worry if the July Contract prior to December is higher. You will never raise corn that you will be able to harvest in July. September is probably the earliest you could harvest. An excellent means to Contract wheat for harvest delivery. Especially spring wheat. basis on wheat usually narrows into harvest. If you sell grain using an HTA Contract , the elevator makes the margin calls if prices move higher. If you wish to trade the futures market and plan on doing it through an elevator using HTA contracts to avoid making margin calls, you may find a rude surprise at the end of the transaction if you are wrong.

9 Use a broker for that purpose, not the elevator.