(Non-Roll)
Description
This type of contract is the basis of a contract; it permits
the seller to set the futures level on the contract date, but
the basis level is determined by the seller at a later date.
The contract transfers the futures risk and opportunity from
the seller to the buyer on the contract date.
Example: On July 1, a producer agrees to sell
a specified quantity for November delivery. The futures price
is set at $2.50 per bushel per the December contract on the Chicago Board of Trade (CBOT). The
basis level remains open, to be set by the producer at some future
date (no later than the date of delivery for a non-roll contract).
Risk to Seller
The seller's futures risk ends on the date and at the price
of the contract, but the seller retains the basis risk. The seller
also is subject to production risk; that is, the producer
is responsible for delivering the contracted amount on the delivery
date.
Risk to Buyer
The buyer accepts the futures risk at $2.50 per bushel on
the contract date.
Who Might Use This Contract?
A producer who believes that basis (cash price minus futures
price) will strengthen as the referenced contract month approaches.
This producer should be prepared to assume the financial risk
should the basis weaken.
Upside Price Potential. The futures price is established
in the contract, so any gain to the producer will be basis only.
As cash prices and futures prices tend to converge near contract
expiration, basis levels may strenghten and some price benefit might
be gained, depending on when the producer establishes the basis
level.
Downside Price Potential. Again, since the futures
price is established in the contract, any gain or loss to the
producer will be on basis. If the basis does not strengthen as contract
expiration nears, and actually weakens, the producer has
a basis loss.
When Might This Contract Perform Well?
Traditionally, cash and futures prices converge as the
contract expiration date nears. If that relationship holds true,
the producer stands to gain from the strengthened basis level.
Mention of product names or firms does not
necessarily constitute endorsement by the Risk Management Agency
or the U.S. Department of Agriculture over others not
mentioned, and is for information purposes only.
For more information, contact Eric Henry.
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