As a specialist in crop insurance matters, Kansas State University professor Art Barnaby fields a lot of questions about his chosen field. Questions he's been asked recently have to do with hedge-to-arrive contracts.

"Some people have asked recently about hedge-to-arrive (HTA) contracts. They're wondering if those are the instruments that got some farmers into trouble several years ago," said Barnaby.

"Hedge-to-arrive contracts based on harvest futures prices did not get growers into trouble. The issue was with the rollover HTAs," explained Barnaby, who is a farm management specialist with K-State Research and Extension. "The elevator was selling July corn futures and then they were going to roll over to December futures. The contract spread between July and December (futures) did not narrow as forecasted by many marketing experts, but instead, widened. Because growers could not deliver corn in July, they had to pay the cancellation penalty that was equal to the margin loss on the July futures contract."

The normal HTA procedure for new crop corn is for the elevator to sell December futures as they do for a forward contract, he said. The only difference between a HTA and forward contract is that the basis is open on the HTA, but locked in on the forward contract. If the basis bid in the forward contract is weak, the HTA will net a higher price if the basis improves.

Some elevators refer to these contracts as "open basis" contracts because of the "bad name" attached to HTAs, Barnaby said. Both open basis contracts and forward contracts require delivery. If the grower cannot make delivery under either the forward contract or open basis contract, he or she will have to pay the cancellation penalty. In some cases some elevators have allowed growers to roll the contract forward and make delivery in the next crop year when growers cannot make delivery due to crop failure. In most cases, however, elevators are not under any obligation to allow growers with a failed crop to make delivery from the next crop.

"Growers reduced the financial risk caused by not being able to deliver due to a crop failure if they purchased Revenue Assurance with the Harvest Price Option (RA-HPO) insurance or Crop Revenue Coverage (CRC) insurance before March 15," he said. "If the crop fails and market prices increase, growers will receive a larger indemnity payment that will help cover the cancellation penalty and crop production expenses."

For more information about crop insurance, interested persons can visit the K-State Research and Extension Web site: http://www.agmanager.info/crops/insurance.

K-State Research and Extension is a short name for the Kansas State University Agricultural Experiment Station and Cooperative Extension Service, a program designed to generate and distribute useful knowledge for the well-being of Kansans. Supported by county, state, federal and private funds, the program has county Extension offices, experiment fields, area Extension offices and regional research centers statewide. Its headquarters is on the K-State campus in Manhattan.