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Be careful with hedge-to-arrive contracts

Agriculture.com Staff 03/02/2007 @ 2:19pm

We see two issues that could negatively impact hedge-to-arrive contracts this year. With a hedge-to-arrive contract, you are making an agreement with a buyer, usually elevators, that they will sell futures for you and meet margin call. In return, you agree to deliver grain.

Basis is not fixed. The first problem we see is if a big crop is produced, basis could sink out of sight by harvest. Therefore, if you use or intend to use hedge-to-arrive contracts, be prepared to lock in basis if it improves.

Secondly, what happens in a weather market? Undoubtedly, corn prices could rally sharply. Elevators agree to meet margin requirement for producers. In 1996, when corn prices began a steep rally upward, many elevators could not afford the margin requirement and instead exited positions, leaving farmers with a significant loss. We encourage you to have strong communication ties with your elevators and be confident they can and will be able to meet margin calls. Do not be afraid to ask!

Our intent is not to scare you from using hedges to arrive contracts, but we want you to have knowledge and confidence when using them. However, with tightening supplies and the possibility that corn prices could move dramatically upward or downward, you need to be aware of potential large pitfalls. The last thing farmers need is a 1996 hedge-to-arrive fiasco all over again. Remember, history has a tendency to repeat itself.

If you have any questions or comments, please contact Top Farmer at 1-800-TOP-FARM, ext. 129.

We see two issues that could negatively impact hedge-to-arrive contracts this year. With a hedge-to-arrive contract, you are making an agreement with a buyer, usually elevators, that they will sell futures for you and meet margin call. In return, you agree to deliver grain.

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