The Failure of Multi-Year Hedge-to-Arrive Contracts

Thumbnail Image
Supplemental Files
Date
1999
Authors
Hayenga, Marvin
Major Professor
Advisor
Committee Member
Journal Title
Journal ISSN
Volume Title
Publisher
Abstract

In the late 1980s, grain elevators in Ohio developed the hedge-to-arrive contract (HTA) to induce farmers to use their grain handling facilities and/or merchandising services. Farmers wanted to use HTAs to lock-in abnormally attractive price levels for more years of expected production. Supposedly, the multiple-year HTA would lock-in those attractive prices without farmer margin calls (money required by commodity brokers as security against default) if futures prices rose further. A National Grain and Feed Association survey in early 1996 found that 45 percent of responding elevators offered single or multi-year HTAs, accounting for 6 percent of their grain volume. Many multi-year HTAs proved to be an economic disaster in 1996 when corn prices skyrocketed to unprecedented levels. The false premise underlying the contract design which we discuss in this paper became exposed in dramatic fashion. How did this disaster happen? How might it be prevented in the future?

Series Number
Journal Issue
Is Version Of
Versions
Series
Academic or Administrative Unit
Type
article
Comments

This is a manuscript of an article from Choices 14 (1999): 37. Posted with permission.

Rights Statement
Copyright
Fri Jan 01 00:00:00 UTC 1999
Funding
DOI
Supplemental Resources
Source
Collections