With this type of contract, the potential price gains come only from improving the base or increasing the price by a few cents to a later month of futures contracts on old crops. None of these higher price sources are guaranteed. Both carry risks, and both can lead to lower net spot prices. These contracts guarantee a forward price level and prevent them from benefiting from a rising futures market. Intraannual rolled HTAs are more complex than non-rolled HTAs because the manufacturer has to decide when to establish the basis and when to establish the contract. Risk exposure is generally higher because rolling ETS contracts during the year include both baseline risk and intra-annual spread risk. Non-ro ETS eliminate price level risk, but carry a baseline risk – the risk that the difference between local spot prices and the nearby forward price will move in an unfavourable direction, lowering the net price received by the producer. The baseline risk is usually relatively low, but can be significant in times of extreme weather problems, insufficient storage space, transportation problems, and demand shocks. Spread risk (differences between the different months of delivery of forward prices) is not involved in these contracts. Intra-annual ETS carry both a base risk and an intra-annual spread risk. Intra-annual spreads (differences between the different months of delivery of forward prices) are more typical in years when supply is incredibly scarce.
These contracts are like non-ro ETS, except that the delivery date can be changed to another time during the same harvest year (September to August). This flexibility in delivery dates translates into a risk of intra-annual spread that is generally low. However, caution should be exercised when transferring old harvest contracts to new months of harvest contract. Typically, September corn and soybean futures mark the start of a new marketing year. This publication contains training information to help you understand the risk management functions of grain contracts. This is neither a legal document nor an endorsement of any type of contract by Iowa State University Extension and Outreach. Contract details vary. Some contracts may contain provisions that are not included herein. Familiarize yourself with a contract before signing.
Seek professional help if there are any details you don`t understand. Before entering into the contract, everyone must assess their risk exposure to extreme market movements. Here is an example of case law on hedging contracts to arrive: In the spring of 1996, the Commodity Futures Trading Commission (CFTC), the regulator of the commodity futures market, issued guidelines that discourage the use of ETS that allow interannual turnover. The regulatory review and ongoing litigation have changed the future use of these multi-role and multi-role ETS. The grain industry no longer offers this type of annual HTA contracts. In short, significant exposure to risk was associated with one-year rolling HTA contracts, creating a stigma that lasted for decades. A standard hedging contract to arrive is a futures contract in which the farmer promises to deliver a certain amount of grain at a price tied to the price of a futures contract that expires in the month of delivery. From the farmer`s point of view, such a contract is a normal futures contract that transfers the risk to the buyer that the market price will fall before delivery (while preventing the farmer from benefiting from the price increase). From the buyer`s point of view, the ETS contract facilitates coverage. [Nagel v. ADM Investor Servs., 1999 U.S. Dist.
LEXIS 12438 (N.D. Ill. 5 August 1999)]. Interannual spreads can be extremely volatile and involve significant exposure to futures prices and spread risks. These contracts are no longer offered by the grain industry. For an explanation of these types of risks, see Commonly Used Grain Contracts, A2-73/FM 1905. These contracts were originally offered as an alternative to basic contracts, the basis of which is determined at the beginning of the contract. Nevertheless, the producer has a longer period of time to choose his price level, as evidenced by the futures market. In contrast, non-roll ETS set the price of futures contracts at the beginning of the contract, but let the base settle later. Rollless ETS are like indexing contracts, except that the base is set at a time chosen by the manufacturer, but usually before the actual grain is delivered. The elevator or transformer that initiates the contract hedges the position by selling futures contracts and is exposed to margin calls when futures prices move in a detrimental direction. It is the producer and not the elevator or processor that bears the basic risk.
The main difference between non-ro ETS and cash futures contracts is the change in base, which indicates the possibility of a higher or lower final spot price reflecting the accepted final base. The hedging contract to arrive is a contract used in futures trading where the forward price is determined when the contract is created, but the base level is determined later, usually just before delivery. Non-rollable HTAs require that a certain quantity and quality of grain be delivered on a predetermined date and location that cannot be changed. The only decision left after the contract is signed is when the basis should be established. Non-ro HTA contracts for corn and soybeans can be for delivery during the current crop year or for delivery of the next two crop years. Delivery in subsequent harvest years is possible because the Chicago Mercantile Exchange simultaneously negotiates crop delivery futures contracts for three different harvest years. Therefore, an elevator or processor could simultaneously offer unrolled corn ETS for delivery in the fall of 2020 based on corn futures from December 2020. In addition, the 2021 and 2022 unrolled corn ETS are based on December 2021 and 2022 corn futures prices.
Base risk is the main market risk for the manufacturer who does not use rollless ETS contracts. The base risk is usually much lower than the risk at the price level. As with a forward cash contract, non-ro ETS prevent the producer from benefiting from rising futures prices, but protect against falling forward prices. If the base is strengthened from the beginning of the contract until the moment the manufacturer establishes the basis, the net price increases compared to what was available at the time the contract was initiated. When the base weakens, the net price for the producer decreases. To use these contracts effectively, the producer must have a good understanding of the local base and the factors that influence it. He must also be able to monitor the base and decide when to set the base. Hedge-to-arrive (HTA) contracts were used in the Corn Belt in the early 1990s. There are two main types of forward ETS, ranging from a non-ro HTA contract with a relatively simple two-decision version to a slightly more complex intra-annual sliding ETS contract limited to the typical growth year of the plant each year (September 1 to August 31). Thus, the 1. September marks the beginning of the new marketing year for arable crops. Since harvesting in the corn belt usually doesn`t start until late September or early October, farmers who use ETS contracts for crop supply prices usually use December corn or November soybean futures.
There are two main types of ETS futures contracts offered by most corn belt elevators and processors. One is a non-roll ETS contract with a relatively simple two-decision process, where the forward price is initiated first and the basis is set later. .