Get To Know Your Local Basis
A Key Influence On Your Cash Grain Price

To sell grain and use marketing tools effectively, it’s essential to develop a solid knowledge of cash-futures price relationships, according to Ed Usset, grain marketing specialist, Center for Farm Financial Management, University of Minnesota. 

In other words, get to know your local basis, one of the biggest influences there is on your cash grain price.

Basis is simply the difference between cash and futures prices. 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. 

Transportation and local supply and demand influence basis levels.  Knowing when your local basis is stronger and weaker can help you time grain sales and select appropriate marketing tools.  The basis will usually be larger (more negative) during harvest, because of the larger supply of grain compared to demand. On the other hand, the basis is usually smaller (more positive) during spring planting because farmers are not hauling their grain; thus the supply is low compared to demand.

“The basis for a storable commodity displays a distinct seasonal pattern,” Usset explains. “With grain stocks and the demand for storage high at harvest, cash prices are often at their largest discount to the futures at this time. As the crop is put away and some is used, the supply of storage increases relative to demand for its use, and the basis narrows. Astute decision-makers gather a 3-5-year history of their local basis, using daily or weekly data. Many marketing tactics require knowledge of the basis.”

For example, you can lock in the basis any time by signing a basis fixed contract guaranteeing so many bushels will be delivered by a specific date.  Locking in the current basis and a future’s quote later is similar to cash forward contracting.

On the other hand, the basis typically weakens for short-term delivery during harvest, signaling that you are better off not selling cash grain at that time.  However, perhaps your local price has a 15-cent basis “carry” from August until December. That means basis for December is 15 cents higher than the basis in August, signaling a better price for delivery in December.

Crop producers in North Dakota and Minnesota can find local basis information online at www.smallgrains.org .  Click on “Market Quotes and Charts,” then “Local Basis Information.” Also see the publication “Knowing and Managing Grain Basis,” online at http://mastermarketer.tamu.edu/factsheets/rm2-3.pdf.

 

Basis Implications Expected Change   Futures Basis Alternatives Increase Strengthen Storage Delayed Price Contract Put Option Increase Weaken Basis Contract Minimum Price Contract Sell Cash & Buy Futures/Calls Decrease Strengthen Hedged-to-Arrive Contract Hedge Put Options Decrease Weaken Cash Sales Cash Forward Contract