“Yeah, just roll that contract and capture the carry.”
Have you ever heard a merchandiser say that and then wanted to respond, “Uh, come again?”
Today, we’re going to clear up your questions so you don’t hesitate the next time you’re in this scenario!
In this article, I’m going to explain what it means and how it works if you consider rolling an HTA contract with your local grain buyer.
Next week, we’ll tackle how it works to roll a Basis contract.
One step at a time. 🙂
Reminder: An HTA is a contract made with your local buyer that locks in your futures price but leaves basis open to set later.
Therefore, no cash price is established on your contract.
Futures + Basis = Cash
Imagine that back in October, you established an HTA contract to be delivered in February for 10,000 bu of your corn in the bin.
The contract locks in $4.00 March corn futures (CH20).
At this point, this is what’s been established on your contract:
Quantity: 10,000 bu
Delivery: 2/1/20 – 2/29/20
Futures = $4.00 CH20
Basis = ?
Cash = ?
Now, back to carry.
Carry is related to the spread between the futures month your contract is against, and the futures month you’re considering rolling to.
Typically, the market is bidding a higher price for more distant futures months, which means there is a carry from one futures month to the next.
The market is essentially saying it would rather have the grain later so it’s willing to pay a higher price for the grain to be held and delivered later.
This is where ‘capturing the carry’ comes into play.
The opposite scenario (an inverse instead of a carry) can occur, but is not as common as a carry market.
In the scenario we are working with, let’s say you don’t absolutely have to deliver grain in February. You could keep the grain in storage and wait to deliver until June.
Because you’re willing to wait to deliver, you’re considering rolling your March (CH20) HTA contract to July (CN20).
How does that work??
To decide whether it’s worth it to roll your contract to another futures month, you need to pay attention to the spread (the difference in price) between the futures month your contract is against, and the futures month you’re considering rolling to.
In this case, the current price of CH20 is $3.78 and the current price of CN20 is $3.88.
The spread is calculated by subtracting the March futures price (CH20) from the July futures price (CN20).
$3.88 (July) – $3.78 (March) = $.10 (Spread)
Essentially, the market today is willing to pay $.10 for you to wait to deliver in June versus delivering in February, which is indicated by the spread between the futures months.
The spread will fluctuate as market prices move, so be aware that this $.10 is not stagnant.
In this case, if you were to roll your current CH20 HTA contract to CN20, you would take the futures price you have established on that contract ($4.00) plus the current spread ($.10) to determine the new futures price on your contract.
$4.00 + $.10 = $4.10 CN20
After the roll from March to July, the following components on your HTA contract would now be established:
Quantity: 10,000 bu
Delivery: 6/1/20 – 6/30/20
Futures = $4.10 CN20
Basis = ?
Cash = ?
Considering the spread will fluctuate just like prices fluctuate, paying close attention to the spread can be quite advantageous if you have some flexibility when it comes to delivery.
*Be aware that your grain buyer may also charge a FEE to roll your HTA contract.
Thus, in this case, you would capture the $.10 carry by rolling. However, if the grain buyer charges a fee of $.03/bushel then you really only capture $.07 in the end.
Another thing to consider before you decide to roll — what’s your cost of storage?
If you’re storing your grain longer, you want to be sure that the carry captured outweighs your cost of storage, or it’s not worth rolling.
Now, if you’re ever asked about rolling or capturing carry, hopefully this helps clear the air!
This article is always here for reference if you need a little refresher. 🙂