Question

There are several different types of forward contracts that are available to commodity producers. Compare and contrast using a HTA contract versus hedging with a futures contract. Why would a producer choose a HTA rather than hedge with a futures?

Answer 1

HTA : Hedge-to-Arrive (or HTA) Contracts allow the grower(Farmer) to lock in the current futures board price of the grain, while leaving basis and cash price to be set at a deferred date.

Futures : Futures contracts are standardized agreements that typically trade on an exchange. One party agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date. The selling party to the contract agrees to provide it.

Difference

A hedge-to-arrive contract is a pretty good way to play a stronger basis. The best way is with the direct sales of futures contracts. Futures are better than an HTA because a HTA locks you into delivery with the party on the other side of the transaction, and that party is not obligated to match the basis bids in nearby markets. For example, it is possible that next fall you will see that an ethanol plant 20 miles down the road is bidding 25 cents under for corn. And 15 miles the other way, there may be a hog operation bidding 20 cents under. Your elevator may continue to bid 45 cents under and, because that is who you have your HTA contract with, that is the basis you get.

Futures contracts expose you to margin calls (and anxiety), but they also offer you “free agent” status in terms of final product delivery. I like free agent status because that lets me find the best basis in my area. Free agents can do very well.