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Article
The Failure of Multi-Year Hedge-to-Arrive Contracts
Choices
  • Sergio H Lence, Iowa State University
  • Marvin Hayenga, Iowa State University
  • Neil E. Harl, Iowa State University
Document Type
Article
Publication Version
Accepted Manuscript
Publication Date
1-1-1999
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?
Comments

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

Copyright Owner
Choices
Language
en
File Format
application/pdf
Citation Information
Sergio H Lence, Marvin Hayenga and Neil E. Harl. "The Failure of Multi-Year Hedge-to-Arrive Contracts" Choices Vol. 14 (1999) p. 37 - 41
Available at: http://works.bepress.com/neil-harl/34/