Hedge-To-Arrive 01/09/04 7:00:59 PM
Hedge To Arrive Contract
Hedge To Arrive
Contract
Preserving Futures Prices With a Hedge To Arrive Contract
If you want to
preserve a specific futures price level while waiting for changes in the basis level, the
HTA Contract may be a valuable marketing tool for you.
What is it? The HTA contract
allows you to identify the futures level used to determine the final cash price for a
specific quantity and quality of a commodity for future delivery, while allowing you to
select or lock in at a later date the basis level over or under the futures level
previously established in the contract. Depending
on local policies the HTA contract may be amended or rolled to a later futures month in
the same crop year.
What
are the advantages of a Hedge to Arrive Contract?
This contract
provides you with additional time to take advantage of possible improvements in the basis
level while having the futures portion of the pricing formula locked in.
Where the contract
is allowed to be rolled, you can benefit from any carry in the market and to gain
additional flexibility in bin-space planning.
The Contract may be
written for any quantity.
You may establish
the basis at any time prior to delivery and the pricing deadline.
No margin calls are
involved.
What are the risks and disadvantages of a HTA Contract?
You are unable to
capture higher futures levels in rising markets
You remain subject
to fluctuations in basis levels.
You cannot deliver
the physical commodity until the basis is established.
Should delivery be
necessary for space or cash-flow reasons, you may be forced to accept a basis level that
is wider than desired.
If you elect to amend
the contract to delay the delivery obligation during a market inverse, the spreads will
have moved against you, resulting in a final cash price that is lower than expected.
Amending or rolling
the contract may entail transaction costs and service charges.
When is it used? Sellers generally
use the HTA when the futures prices are attractive but cash prices are lower than usual
due to a basis level that is wider than normal. In
many markets, basis levels tend to be wider than normal when futures levels are high. The HTA contract is a tool used to help manage the
market price risk of production and capture basis returns for space and capital.
How do I amend or roll a HTA Contract? You may amend or
roll a contract to a new futures reference month within the crop year. These amendments allow you to shift forward the
delivery month and futures reference price of the contract.
If the contract is amended, the contract reference price will be adjusted by
the difference between the currently tradeable level for the original futures reference
month. The final contract price will increase
if the new futures price is higher than the original price (a carry) and will decrease if
the new futures price is lower (an inverse). The
number of times that the HTA contract may be amended or rolled varies by location, consult
with your local UFC representatives for the number of times they allow.
For purposes of this
contract, crop years are defined as December-July for corn; November-August for soybeans;
July-May for winter wheat. Any amendment or
rolling to futures months other than these will be done only at UFC discretion and then
only upon a thorough risk analysis.
How does it work? On July 1, the posted
fall delivery bid is $2.30 per bushel and the December futures level is $2.70. That equates to a basis level of 40 cents under
the December futures. You like the futures
level but think the basis is historically wide and will narrow before you plan to deliver. You enter a HTA Contract with UFC, locking in the
$2.70 December futures level as your futures reference point.
On October 1, the December
futures have dropped to $2.25 per bushel and the cash bid is $2.00, resulting in a basis
of 25 cents under the December futures. This
is an acceptable basis level to you, so you instruct your local UFC Service Center to
establish the basis on your contract at 25 cents under the December futures level
previously agreed to as your contract reference point.
Using this strategy,
you would net 15 cents more per bushel than you would have with a regular cash forward
contract. (Service charges would be deducted
from the final settlement price.)
HTA Contract
Priced Purchase Contract on July1
$2.70 December futures
$2.70 current December futures
($0.25) basis level
($0.40) basis
$2.45 final price
$2.30 current price
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Also note that if the futures
level had risen above $2.70, or if the basis had increased to more than 40 cents under the
December futures, you would have received less for your crop than if you had waited to
sell on a cash basis.
This marketing
alternative overview has been prepared to help you identify the marketing alternatives
offered by Ursa Farm Marketing, along with the advantages and disadvantages of each. Ursa Farm Marketing has used its best efforts to
provide you with this useful and helpful information.
However, we cannot guarantee that this contract alternative will function in
the same way in each and every situation, and information which may be accurate for one
farmer, may not necessarily prove to be accurate for another. Therefore, we do not make any warranty or
guarantee as to the accuracy of any of the information as it is applied in a particular
marketing strategy. Entering into any of the
transactions outlined in this presentation will not result in your opening a futures
account with UFM or otherwise, nor will you obtain a futures position. The only futures position relative to any
transaction, if one exists, will be held by UFC. This
and other contracts may employ the futures market as a grain pricing mechanism, but the
contract described are not, themselves, futures contracts.
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