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TO-ARRIVE BASIS FIXED Contract
FEATURES
* Delivery at a Later Date
* Futures Market Portion Priced at a Later Date
* Basis Priced Immediately
* Payment Received at a Later Date
DEFINITION
This marketing alternative allows the seller of grain to sell for future delivery at a predetermined basis level. This futures market portion of the pricing on the contract can be done at a later date. This alternative is suitable for use if the seller of grain is able to capture favorable existing carrying charges. The seller must also feel the deferred basis markets will decline and the futures market will rally before pricing the futures portion of the contract. The existence of these considerations will support the appropriate use of this marketing concept. Normally this marketing alternative will require the seller to price the futures portion of the contract by a predetermined date.
ADVANTAGES
* Allows the seller the ability to lock-in favorable basis market carrying charges.
* Allows the seller the ability to benefit if the seller feels the futures market will rally before the pricing date on the contract.
* Allows the seller the ability to lock-in favorable basis levels if the seller feels the basis market will decline prior to pricing the futures portion of the contract.
* Allows the seller the ability to sell grain in a time frame that supports the seller's work schedule.
* Allows the seller the ability to sell grain at a time when transportation is more readily available.
DISADVANTAGES
* Requires the seller to inventory grain until the shipment period of the contract. This may expose the seller to the risk of quality deterioration inherent in storing grain.
* May expose the seller to additional storage costs until shipment is completed on the contract.
* Restricts the seller's ability to arbitrage grain to the best market upon shipment.
* Exposes the seller of grain to declines in the futures market portion of the contract.
* May expose the seller of grain to quality risk when selling grain that has not been harvested.
EXAMPLE
On July 15th, FREMAR posts a price of $2.15 per bushel for Oct/Nov corn. At the time, December futures are $2.55 per bushel, resulting in a basis level of 40 cents under the Dec. You believe this is a good basis, but you are also confident that the futures are going to rally, so you enter into a To-Arrive Basis Fixed contract at 40 cents under the December futures.
On November 20th, December futures have risen to $2.70 and the local cash bid is $2.20 per bushel. This is a basis of 50 cents under the December futures. You instruct FREMAR to lock in the $2.70 December futures level on your To-Arrive Basis Fixed contract. In this case, you would net 15 cents more than you would have received had you sold it on July 15th.
However, if the futures level had dropped below $2.55, or if the basis had narrowed to less than 40 cents under the December futures, you would have received less for your corn than if you had sold it on July 15th
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