Opinion ID: 2994173
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Heading: introduction

Text: Farmers often contract to sell grain to grain elevators at some specific time in the future. Such contracts guarantee farmers a buyer for their grain and guarantee grain elevators a supply of a commodity. The contracts generally specify the quantity and quality of grain to be sold, as well as a delivery date and a price for the grain. Both parties, by agreeing in advance to the grain price, take a risk that the market will move against them. The farmer’s risk is that grain prices will be higher at the time of delivery, thus causing him to forego profit by selling at too low a price; the elevator’s risk is that prices will drop, causing it to purchase unduly expensive grain. Hedge-to-arrive contracts (HTA contracts) attempt to alleviate these risks by introducing price flexibility. See The Andersons, Inc. v. Horton Farms, Inc., 166 F.3d 308, 319 (6th Cir. 1998). HTA contracts use two price indices--a futures reference price, set by the Chicago Board of Trade for some time in the future, and a local cash basis level, which is a local adjustment to the national price. See id. In an HTA contract, the parties generally agree at the time of contracting on the national portion of the price, and defer agreement on the local part of the price. See id. Many HTA contracts are flexible, meaning the parties may roll the established delivery date to some point in the future. See id. When an elevator enters an HTA contract, it usually hedges, or tries to offset the risk of paying unduly high prices, by buying an equal and opposite position in the futures market. See id. If either party to an HTA contract rolls the delivery date forward, the elevator buys back its original hedge and rehedges by purchasing a new futures contract. See id. The spread between the original hedge position and the rolled hedge position is attached to the price per bushel of the original HTA contract, and the farmer runs the risk of assuming a debit. See id. The Commodity Exchange Act (CEA), codified at 7 U.S.C. sec. 1 et seq., and regulations promulgated under it govern contracts for sale of a commodity for future delivery--futures contracts. The CEA specifically excludes from the definition of futures contracts--and thus from its reach--the sale of a cash commodity for deferred shipment or delivery--cash forward contracts. See 7 U.S.C. sec. 1a(11); see also The Andersons, 166 F.3d at 318. HTAs began as simple variants of cash forward contracts, but soon began to acquire more and more characteristics of futures contracts. This process has progressed to the point that it is now possible to argue that newer versions of HTAs are more like speculative futures contracts than cash forward contracts. Charles F. Reid, Note, Risky Business: HTAs, the Cash Forward Exclusion and Top of Iowa Cooperative v. Schewe, 44 Vill. L. Rev. 125, 134 (1999). Several courts have concluded that HTA contracts are cash forward contracts that may be sold off-exchange./1 But the CFTC has leaned towards characterizing HTAs as futures contracts that must be sold on designated exchanges./2