1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor 1

2. Rolling a hedge Definition
To continue to hedge for additional months beyond the expiration of the original contract
Done by offsetting original contract
Simultaneously taking new position in a more distant month
The forward price of the hedge is switched to a more distant maturity

3. Rolling a hedge When would you do this?
Have storage facilities and flexible cash-flow
See an opportunity to obtain additional returns from storage

4. Rolling a hedge: Example
Producer is planning to sell corn in December
On June 2nd, he hedges using Dec futures
Short Dec = $2.85/bu
Expected basis for Dec = -$0.20

5. Rolling a hedge: Example
Producer goes short in Dec contract
Expected spot price at time of maturity
= $2.65/bu ($2.85 – $0.20)

6. Rolling a hedge: Example
On Nov 16th
Dec futures price = $2.38
Mar futures price = $2.52
Dec-Mar spread =-$0.14
Expected basis for Mar = -$0.15
Storage costs = $0.03/mo
Again, just your belief about the basis
Assume this is the full costs involved in carrying or storing

7. Rolling a hedge: Example
Offsets Dec contract
Long in Dec for $2.38
Producer rolls hedge to Mar
Goes short in Mar for $2.52
Stores grain from December to March
Cost to store until March: $0.03 X 3mo = $0.09/bu

8. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $1.38 = $2.75
June 2nd
Nov 16th
Mar 14th
Net
Cash
Crop is growing --
Sold physical 3.75
= 3.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
3.90
2.52 – 3.90
= -1.38

9. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $1.38 = $2.75
June 2nd
Nov 16th
Mar 14th
Net
Cash --
Sold physical 3.75
= 3.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
3.90
2.52 – 3.90
= -1.38

10. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $1.38 = $2.75
June 2nd
Nov 16th
Mar 14th
Net
Cash --
Sold physical 3.75
= 3.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
3.90
2.52 – 3.90
= -1.38

11. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $1.38 = $2.75
June 2nd
Nov 16th
Mar 14th
Net
Cash --
Sold physical 3.75
= 3.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
3.90
2.52 – 3.90
= -1.38

12. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $1.38 = $2.75
June 2nd
Nov16th
Mar 14th
Net
Cash --
Sold physical 3.75
= 3.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
3.90
2.52 – 3.90
= -1.38
2.75

13. Rolling a hedge: Example
Put it all together:
Overall revenue: $ $ $1.38 = $2.75
June 2nd
Nov16th
Mar 14th
Net
Cash --
Sold physical 3.75
= 3.66
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38
= 0.47
Mar
Sold Mar
2.52
Bought Mar
3.90
2.52 – 3.90
= -1.38
2.75
EPR = 2.85 – (2.52 – 2.38) + (3.75 – 3.90)
=2.85 – (2.52 – 2.38)

14. Rolling a hedge: Example
Suppose he didn’t roll the hedge
I.e., he offset his Dec position and sold in the cash market in December
(Like the examples we’ve had before today)

15. Rolling a hedge: Example
Overall revenue: $ $2.18 = $2.65/bu
June 2nd
Dec 14th
Net
Cash --
Sold physical
2.18
Futures
Dec
Sold Dec
2.85
Bought Dec
2.38
2.85 – 2.38 = 0.47
Mar
2.65

16. Rolling a hedge: Example
By rolling the hedge forward, made
$ $2.65 = $0.10/bu
more than he would have if he just closed out his position in December
Risky decision because don’t know realized MAR basis at the time of rolling the hedge
If contemplating rolling hedge in DEC, know all components of equation except B2, need to speculate on this value to decide if better off storing or not
DEC/MAR spread is major factor in decision. If market offers enough premium, can probably risk basis fluctuation and roll the hedge

17. Rolling a hedge forward: Review
Rolling a hedge forward is exchanging your current position for one in the more distant future
Another way to bet on basis
If basis narrows (or increases ) the short hedge (or example) makes money
Rolling the hedge forward allows you to take advantage of basis changes when you have already taken a position

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