Grain Marketers
Last fall we were looking at a very distinct market environment: extremely
wide basis and large carrying charges, particularly in corn.  These were
textbook conditions for "selling the carry" with a forward contract,
hedge-to-arrive contract or by the direct sales of futures.  I know a number
of people who used hedge-to-arrive contracts for delivery in June.  The
basis has narrowed since harvest, but it remains at a record wide level for
this time of year (see my recent diatribe in Ed's World, "I got the grain
basis blues").  What are your alternatives for action?  

Your HTA contract may demand delivery in June with no exceptions.  The hedge
worked, but not nearly as well as I had hoped for last fall.  In mid-October
I had a cash price of $1.40 per bushel and was looking at a 46 cent LDP.
December corn futures were trading at $2.03 and the carrying charge to July
was 28 cents (July at $2.31).  At harvest, my basis was 91 cents under the
July.  I grabbed the LDP and sold the carry using an HTA with the July
contract at $2.31.  I was hoping (begging?) for a spring corn basis of 35-45
under the July by May or June - what I got is 58 cents under the July, the
WORST basis in Southwest Minnesota over the past 25 years.

When I deliver on my contract in the next two weeks, I will end up with a
final price of $2.19 per bushel ($2.31 July futures less $.58 basis, plus
$.46 LDP).  That is not a terrible price but it is 20 cents less than I was
aiming for because of the WORST basis in Southwest Minnesota over the past
25 years!

Let me see if you are interested in trying another way out.  Can you roll
your HTA forward to the September contract?  (Here's a big advantage to
using futures contracts directly - you can roll your hedge forward)  Check
the specific terms of your HTA contract. Most, but not all elevators offer
HTA contracts that allow you to roll your hedge forward (always within the
same crop year and they may charge you a modest fee).  If your contract
allows you to roll forward, then you should consider rolling your HTA
written with the July'06 corn futures contract to the Sep'06 contract.  The
purpose of rolling the hedge is to buy time - the basis is at record wide
levels but it won't stay there forever.  

This is how it works. Go to your elevator and express your desire to roll
the hedge to the September contract. They will write a new contract using
the September contract as the pricing base. What happens to your 26 cent
"loss" in the July contract (In my case, sold at $2.31 per bushel at
harvest, now trading at $2.57)? The loss is taken out of the September
futures price, so instead of an HTA with September futures at the current
market of $2.68, the contract will be written with the September contract at
$2.42 ($2.68 actual adjusted for the 26 cent loss in the July). Seek a new
delivery date for last-half August.  The current basis is 71 cents under the
September contract (60 cents under the July plus an 11 cent carrying charge
to September).  A basis of 50 cents under the September by the last half of
August is a possibility.  Rolling the hedge forward is not guaranteed to pay
off, but it does buy you time for the possibility.

Something must change in the months ahead because cash and futures markets
are out of whack. Weak basis levels and wide carrying charges scream "too
much grain".  At the same time futures prices, particularly wheat and corn,
stay strong or seek higher levels. Things won't stay out of whack forever -
either futures prices will fall to reflect what the basis is saying (too
much grain), or the cash market will move sharply higher to reflect the
economics indicated by the board. Corn and soybean basis levels could narrow
20 cents per bushel and still be wider than normal by the end of June.  I
can only guess what event might actually change the tone of the current
basis environment.

This exceptionally wide basis does put a different spin on the 11th
Commandment of Grain Marketing: "Thou shall not hold unpriced grain in the
bin after July 1". The greatest price risk to holding unpriced grain in the
bin beyond early summer is a basis risk. There is a very strong history of
basis levels in corn, soybeans and spring wheat declining from July to
harvest. But think about the nearby basis relative to new crop futures
prices and you will get a different sense of basis risk.

Look at the current market. The nearby corn basis is quoted at 58 cents
under the Chicago July futures price. Currently there is a 25 cent carry
from the nearby July contract to the December new crop contract. In other
words, the current corn price is 83 cents under December!  Do the same math
with soybeans and you will learn that the current soybean price is 91 cents
under November (66 cents under the July plus a 25 cent carry from July to
November).  If you are hedged with an HTA contract, your "11th Commandment"
concern is basis risk.  Basis is already rock-bottom lousy - I can't see the
downside from these levels. 

Can you roll your hedge forward?  
Edward Usset 
Grain Marketing Specialist 
Center for Farm Financial Management 
University of Minnesota