Basis Carry and HTA

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 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.

Intra-year rolling HTAs

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.

Inter-year single-crop rolling HTAs

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.

Multi-year inter-crop 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.

Basis Education

What is Basis

Basis is the difference between local cash price and futures price is due to transportation costs, storage costs, supply and demand conditions, etc.

Factors affecting basis

Basis is affected by storage and interest costs. At harvest the cash price is below the futures prices because of these costs. As the marketing year progresses, cash price increases relative to futures price. This occurs because the cash price must rise to cover additional storage and interest. However, the futures price does not rise because these costs are already included in the futures price--costs to a specific future delivery month (i.e. July Futures). As the marketing year progresses and cash price approaches each futures contract delivery month, the Chicago cash price and the futures price converge.

The local cash price and Chicago cash price differ by transportation costs. The transportation cost differential is due to the added cost of shipping grain from the local location. Basis is also affected by local supply and demand conditions. Heavy farmer selling will tend to lower cash price but will have little effect on futures price, so basis will widen. Conversely, light selling will tend to strengthen cash price but will have little effect on futures price. So basis will narrow.

For more perspective on basis see the ISU Basis paper

Storage and Carry Costs


The availability of storage adds flexibility to a marketing program. Storage enables the producer to use marketing tools involving storage of grain after harvest.

The proper use of storage in some years will increase a producer's income. However, maximum storage income results from selective rather than continuous use of storage facilities. Storage facilities should be used only when storage is expected to be profitable.

Storage costs

The cost components of storing grain versus selling at harvest are:

  • Storage facility cost
  • Interest on grain inventory
  • Extra drying of corn
  • Extra corn shrinkage
  • Extra handling cost
  • Quality deterioration

Storage facility cost

If grain is stored in existing farm storage facilities, the ownership costs (depreciation, return on investment, insurance, etc.) of the farm storage facility are not included in the analysis of whether to store grain in a particular year.

These costs are not included because the ownership costs of the farm storage facility are incurred whether grain is stored or sold from the field at harvest. Therefore, these costs do not affect the annual decision of whether or not to store grain.

If grain is stored commercially, the commercial storage charge is a cost of storage. The storage charge varies among elevators but usually is a fixed charge for the first few months with an additional charge for each additional month thereafter.

For more perspective see ISU Storage Costs evaluation paper.