Selling the Carry

When considering if you should sell the carry offered by futures markets you need to first consider if the carry and/or potential basis improvement exceeds the costs of holding the physical inventory.  

The MNWestAg carry costs table provides a quick look at the cost to hold grain on farm and in commercial storage. Multiple tables are provided for Corn, soybeans and wheat starting at various prices for each crop and show results for both on farm and commercial storage.

Hedge-To-Arrive Contracts

Hedge-to-arrive (HTA) contracts came into use in the western Corn Belt in the early 1990s, but have been used much longer in the eastern Midwest. There are four main types of futures-based HTAs, ranging from a relatively simple two-decision version to much more complex types that require several decisions after the contract is initiated. MNWestAg does recommend the use if Intra-Year and Non-roll HTA's as a means to potentially capture the carry or better basis but does not advocate the use of Inter-Year HTA contracts.

Non-roll HTAs

These contracts originally were offered as an alternative to basis contracts, in which the basis is set at the start of the contract, but the producer is given an extended time to choose his or her price level as reflected by the futures market.

In contrast, non-roll HTAs set the futures price at the start of the contract, but leave the basis to be set at a later time. Non-roll HTAs are quite similar to cash forward contracts, except that the basis is established at a time the producer chooses. The elevator covers the position by selling futures contracts, and is exposed to margin calls on the futures market if prices move in an adverse direction. The producer rather than the elevator carries the basis risk. The main difference between non-roll HTAs and forward cash contracts is basis risk with its potential for a higher or lower price through basis changes.

These contracts are similar to non-roll HTAs except that the delivery date can be changed to another time within the same crop marketing year (September to August). This flexibility in delivery dates creates exposure to intra-year spread risk.

With this type of contract, potential price gains come only from basis improvement and/or rolling the price up a few cents to a later delivery old-crop futures month. Neither of these sources of higher prices is guaranteed. Both involve risk, and both can result in lower prices. These contracts lock in a level of futures prices, and prevent gaining from a rising futures market.

Intra-year rolling HTAs are more complex than non-roll HTAs because the producer must decide when to set the basis and when to roll the contract. Risk exposure is greater because the intrayear rolling HTA contracts include both basis risk and intra-year spread risk. Although intra-year spreads typically are much less volatile than interyear spreads, they can be quite volatile and can involve substantial risk, especially in years when grain stocks are low. The added complexity of these contracts also increases exposure to control risk.

These contracts operate differently than intra-year rolling HTAs. The date of delivery for inter-year single-crop rolling HTAs can be changed from the original marketing year to the next marketing year. This flexibility has been used in several different ways, including selling old-crop grain on a higherthan-expected cash market and later rolling the futures position into the next year's crop.

This converts the contract into a speculative position in which higher futures prices generate losses that must later be deducted from the new-crop position. In addition, when a producer plans to move the delivery date from an old-crop month into the next crop year, risk exposure increases dramatically because of exposure to inter-year futures price spreads. If old-crop to new-crop spreads widen before rolling, the new crop price will be reduced. In years of tight supplies, this risk can be extremely large. Controling risk also can be large in fast moving markets. Exposure to large control risk means the net price can move quickly to an unacceptable level before a producer can take preventive action. In spring 1996, the Commodity Futures Commission (CFTC), the regulatory agency for commodity futures markets, issued guidelines discouraging the use of HTAs that allow inter-year rolling. Regulatory review and pending litigation could alter future use of these contracts as well as multi-year intercrop rolling HTAs.

These contracts involve extreme risk exposure that vastly exceeds even that of single-crop inter-year rolling HTAs. The contracts sometimes have been used to price several years' expected production with an HTA that begins in old-crop futures. Using these contracts involves making a very questionable and high-risk assumption. The producer assumes that spread relationships from rolling the current crop-year futures prices to prices for later-year crops (perhaps one to five or more years ahead) will provide a net price near that reflected by old-crop futures. There is absolutely no way producers can be assured that the end result of these contracts several years into the future will be even close to the current old-crop market. These contracts reflect extreme and very high-risk speculation.

For more perspective on Hedge-To-Arrive Contracts see the ISU HTA Contracts paper.