Nagel v. Adm Investor Services

Argued May 8, 2000 This is another chapter in the continuing saga of ""flexible"" or ""enhanced"" hedge-to-arrive contracts (we'll call these ""flex HTAs""); for the earlier chapters see Lachmund v. ADM Investor Services, Inc., 191 F.3d 777 (7th Cir. 1999), and Harter v. Iowa Grain Co., No. 98-3010, 2000 WL 426366 (7th Cir. Apr. 21, 2000), in light of which we can be brief. The plaintiffs in these five consolidated cases are farmers who entered into contracts to deliver grain to grain elevators and other grain merchants, the defendants, at a specified future date. So far, we are describing an ordinary forward (sometimes called ""cash forward"") contract, a contract that provides for delivery at some future date at the price specified in the contract. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 357 (1982). The hedging feature that gives the HTA contract its name comes from the fact that the contract price is a price specified in a futures contract that the merchant buys on a commodity exchange and that expires in the month specified for delivery under the merchant's contract with the farmer (the HTA contract). This arrangement hedges the merchant against price fluctuations between signing and delivery. The merchant is ""long"" in his contract with the farmer (the forward contract) in the sense that, if price rises, he's to the good, because the price was fixed earlier, in the contract, and so he bought the farmer's grain cheap. But if the price of grain falls, he's hurt, because he's stuck with a contract price that is higher than the current price. To offset this risk he goes ""short"" in the futures contract--that is, he agrees to sell an offsetting quantity of grain at the same price as fixed in the forward contract. If the price of grain falls during the interval between the signing of and delivery under the forward contract, though he loses on the forward contract, as we have seen, he makes up the loss in the futures contract, where he is the seller and therefore benefits when the market price falls below the contract price: The loss he would otherwise sustain as a result of having to resell the farmer's grain at a lower price than the price fixed in his contract with the farmer is offset by his profit on the futures contract. In sum, the price in the contract between farmer and merchant fixed by reference to the futures contract made by the merchant protects the farmer against price fluctuations between the signing of the contract and the delivery of the grain (just because it is a fixed price and so is unaffected by any change in market price during this interval), while the futures contract itself protects the merchant from the risk of loss should the price plummet during that interval.