Beach Cooperative Grain Company

Rolling Contracts  12/10/15 2:50:41 PM

Rolling Basis Contracts
 
Rolling basis contracts is a simple way to buy yourself more time before having to lock in a futures price. The process of rolling your basis contracts is free, you can do it for up to 4 futures months, and the difference you see in your basis is determined by the spread in the futures months. On the day you roll your cash price will stay the same. In a carry market the front futures month is lower than the deferred futures months. For example, if you locked in your basis at -0.40 the December while the December futures are trading at $5.40 and the March futures are trading at $5.50 and you want to roll your basis will now become -0.50.
 
  Dec Futures + Basis = Cash
Before Roll $5.40 + -0.40 = $5.00
 
 
Dec Futures - March Futures = Futures Spread
$5.40 - $5.50 = -0.10
 
 
Old Basis + Futures Spread = New Basis
-0.40 + -0.10 = -0.50
 
 
  March Futures + New Basis = Cash
After Roll $5.50 + -0.50 = $5.00
 
 
In an inverted market, the futures price of the nearby month is higher than the deferred months. In this scenario you have your -0.50 basis from the last roll but now March futures are trading at $5.25 so you decide to roll again. The May futures are trading at $5.20, so because of the 0.05 inverse your basis now becomes -0.45.
 
  March Futures + Basis = Cash
Before Roll $5.25 + -0.50 = $4.75
 
 
March Futures - May Futures = Futures Spread
$5.25 - 5.20 = .05
 
 
Old Basis + Futures Spread = New Basis
-0.50 + .05 = -0.45
 
 
  May Futures + New Basis = Cash
After Roll $5.20 + -0.45 = $4.75
 


Rolling Futures Contracts
 
At times it may be beneficial to roll a futures contract. The process is very similar to that of rolling a basis contract. There are multiple things you need to consider before rolling. What do you expect the basis to do during the delivery period of the next futures month? Do you need to sell grain during the current delivery period? Which delivery period works best for you and your schedule? In the below scenario December futures are currently trading at $5.40 while March is trading at $5.50. You wisely sold futures last fall on some of your bushels at $6.20. You decide that the right move for you this year is to roll your futures contract forward into March. You pick up the extra dime in your futures price and push your options for delivery dates back to January, February, or March.
 
 
Dec Futures - March Futures = Futures Spread
$5.40 - $5.50 = -0.10
 
 
Your Dec Futures - Futures Spread = Your New March Futures
$6.20 - -0.10 = $6.30
 
  
In an inverted market it makes more sense to deliver your grain than to roll it to a forward contract month. As you can see below by rolling your contract into an inverted market where December futures are at $5.25 and March futures are at $5.20 you actually lose 5 cents on your futures price. The only time this is beneficial is when you anticipate basis to rally more than the current futures spread.
 
 
Dec Futures - March Futures = Futures Spread
$5.25 - $5.20 = .05
 
 
Your Dec Futures - Futures Spread = Your New March Futures
$6.20 - .05 = $6.15
 
  
Beach Coop is NOT a broker. All futures contracts made with us are to be made with the intent of delivering bushels. Beach Coop uses futures only contracts when planning for freight purchases, therefore no contract can be rolled into a new crop year.
 
 
Copyright DTN. All rights reserved. Disclaimer.
Powered By DTN