Successful Marketing Plan Requires Basis Understanding

Developing a successful marketing plan for grain commodities requires an understanding of the basis. Basis is calculated by subtracting the daily closing futures price of the nearby grain futures contract from the daily cash price of that same grain commodity.

Basis is simply the cash price minus the futures price. For example, if the Minneapolis September spring wheat futures contract is $3.25 per bushel and the price offered at the local elevator is $3.00 per bushel, the basis is 25 cents per bushel under the September.

Since cash prices in the region are typically lower than futures prices, a negative number usually reflects basis values in the Dakotas and western Minnesota. Basis is determined by a variety of factors, including local demand and transportation costs. However, for most producers, the factors that determine basis are unimportant. What does matter is how the basis at the local level relates on a historical scale.

Alan May, South Dakota State University grain marketing specialist, says that the basis for various crops has seasonal patterns that can be used to develop strategies for selling or holding grain. Basis is critical in any hedging strategy utilizing futures or options. It is also important in evaluating cash forward contracts, minimum price contracts and hedge to arrive contracts. It is also critical in evaluating cash prices offered at any given point in time during the year.

May and extension assistant James Walti have prepared wheat, corn, and soybean basis charts for five regions of South Dakota. The charts contain the weekly basis values for a four-year period; 1997-2000. The basis values in the charts were collected each Thursday during the four-year period by the SDSU Economics Department. The basis was calculated by subtracting the closing futures price of the nearby futures contract from the average cash price of grain in selected locations in each of the five regions. The charts can be found online at http://www.abs.sdstate.edu/agecon/SDBasisCharts.pdf.  Adobe Acrobat Reader is needed to read the portable document format (PDF), which is growing in use.  The software can be downloaded free from the website, http://www.adobe.com/products/acrobat/readermain.html.

Basis charts for selected locations in North Dakota and Minnesota can be found online at http://www.smallgrains.org/Toolshed/toolshed.htm. More historical basis charts for selected locations in Minnesota can be found online at http://www.apec.umn.edu/faculty/eusset/.  Read a more complete back-grounder on the basis online at http://www.smallgrains.org/springwh/MGuide99/Sales/sales.htm.

The basis is seasonally weakest at harvest, as indicated by the patterns in these basis charts for wheat, corn, and soybeans for Hunter, ND (about 40 miles northwest of Fargo) in the last decade. The charts indicate the difference between the local cash price and the closest (nearby) futures price. The local elevator, extension service, and commercial market advisors are resources for historical basis patterns in your area.

For more basics on the basis, get NDSU Bulletin EC-1011 “Basis For Selected North Dakota Crops,” available through county extension offices or by contacting the NDSU Extension Distribution Center, ph. 701-231-7882.