Watch Your Basis

Keep eye on improvement to your local basis, a key influence on your cash grain price

Knowing when your local basis – – the difference between cash and futures prices – 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.

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. A 3-5-year local basis history, using daily or weekly data, can help producers make selling decisions.

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 20-cent basis “carry” from August until December. That means basis for December is 20 cents higher than the basis in August, signaling a better price for delivery in December.

Consult with local grain elevator merchandisers for their take on timeframes for basis improvement. Crop producers in North Dakota and Minnesota can find current local basis information online at www.smallgrains.org . Under Market Updates, click on “Market Quotes and Charts,” then Local Elevator Prices.

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

The basis for corn at Hunter, N.D. was 44 under mid-July – close to the 2002-06 average, and considerably better than it was a year ago. Expect the corn basis to be seasonally weak/negative at harvest, but turning stronger/more positive going into next spring. The basis for wheat at Hunter has been weak – 57 under in mid-July, below the average but not far off from what it was a year ago. The dog of the bunch has been the soybean basis, $1.82 at Hunter mid-July, about $1.50 off the 2002-06 average.  Things can only go up from here, and they should: tighter soybean stocks should translate into basis improvement closer to average by next spring.