With the sharp increase in ethanol plants throughout the Midwest, some producers scratch their heads about why basis levels aren't better. While some areas such as central Illinois are running basis levels better than average, other areas such as northern Iowa and southern Minnesota have corn basis levels significantly worse than the five-year average. How can that possibly be?

This year basis levels did not improve as well as many expected, and thus the use of the Hedge-To-Arrive contract (HTA) turned out to be a detriment, not an advantage.

Basis levels are going to be better than they were five years ago (overall) but not nearly as good as producers seem to expect. The answer lies in how ethanol plants lock in their corn needs.

Ethanol plants can't risk running out of corn. As a result, these plants bid for corn 3-6 months in advance and sometimes even further out. Many plants cover 90% or more of their corn needs at least this much in advance. Consequently, the cash bids and basis bids for corn to be delivered in the future are much better than what we have experienced in recent history.

However, because so much of the need is covered as nearby time approaches, there's no need for an ethanol plant to bid up the basis to get corn immediately. As a norm, sharp rises in basis will only occur if and when someone needs corn very badly and right now. If the need is already covered, this doesn't occur.

This diminishes the usefulness of HTA contracts. Particularly in Iowa and Minnesota, many producers will need to look ahead at locking in basis contracts or merely flat price contracts (if they like the price) several months in advance. If using a basis contract, set the futures price later. Remember, in marketing there are always two key decisions to be made — setting the futures price and setting the basis. We've developed a habit over the years of setting the futures price first (HTA) and the basis later. That methodology is now being reversed.

The expanding capacities of ethanol plants create tremendous opportunities for producers but also will result in changing marketing methodologies. Marketing is more complex — not simpler. When looking at nearby basis levels, many will be disappointed. However, if you look at basis levels being offered 2, 3, 4 or even 5 months in advance, the opportunities can be very good. We just all need to adjust to the changing times.

Remember The HTA?

Has the Hedge-To-Arrive (HTA) contract lost its usefulness? Let's roll the calendar back to the mid-1990s, when the HTA was a very popular contract throughout the Midwest. Then came the bull market of 1996 where many producers, particularly in the eastern Corn Belt, hedged corn for fall delivery of 1996 in the July 1996 futures contract anticipating to roll it over into the December at a discount. That never happened, and in fact July corn went to over a $1.80 premium to the December resulting in extraordinary hedge losses and lawsuits. That seemed to end the HTA contract.

However, HTAs are now used almost everywhere again. They have traditionally been used by producers who like the futures price but think basis will get better so they lock in the futures without locking in the basis.

Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.