Issue 23
Marketing Guide
1999

Library

Home

E-Mail

Prairie Grains is the official publication of the Minnesota Association of Wheat Growers, North Dakota Grain Growers Association, South Dakota Wheat, Inc. and the Minnesota Barley Growers Assocation.

Copyright Prairie
Grains Marketing Guide
Summer 1999

 

Want to improve your grain sales?
Start with the basis

By Tim McKim

Learn to talk basis, and you may end up with a few more cents in your pocket when it comes time to market grain. That's the advice of Ed Usset, a grain processing consultant and University of Minnesota marketing education specialist.

"If you listen in on a conversation between traders for two commercial firms, it would go something like, 'I'll pay 23 over the September for that lot of spring wheat, and I can't go any less than 7 under the December on that load of corn,'" Usset says. "Those traders are talking about basis. They could care less what the futures board says. In most years, producers would be wise to do a little basis homework themselves before they simply sell their grain off the combine."

Basis is simply the difference between the futures price and the local cash 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.

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.

 

Minneapolis Basis HRS

To-Arrive Cash Market - 14% Protein

"When it comes time to harvest your grain, the price at the local elevator may look terrible, but the basis may be strong," Usset emphasizes. "Farmers need to look at both the basis and the futures to make the best marketing decisions."

Break down the price
The "flat" price at the local elevator is not as one-dimensional as it may seem.  It really consists of two values: the futures price and the basis. Typically, the basis is a more stable component than the futures price, and as a result it is wise to implement some sort of hedging strategy to limit futures price risk. However, the basis should not be ignored.

 

Minneapolis #1, 14 Protein

To-Arrive Wheat Basis Relative

to Nearby Minneapolis Futures

Usset says many farmers make the mistake of using only a futures-based strategy at harvest, such as selling grain and buying a call option.  "What often happens (when using this strategy) is the farmer sells the underpriced portion of the equation (basis) and buys the overpriced futures," he stresses. "In the end, the call may be worth nothing, and he has no opportunity to take in any appreciation in the basis."

According to Wes Oja, president of Country Hedging, a division of Cenex Harvest States, basis movements are often very predictable from harvest to the end of the year, and this change in value often can be easily captured.

Further, the change in the wheat basis during this time frame can be substantial. In fact, it is often around 15 to 20 cents per bushel, says George Flaskerud, extension economist at North Dakota State University. This appreciation can be captured by holding grain from harvest until around mid-November.

This strategy works, Oja says, because so much grain is sold at harvest that the basis is depressed. A couple months later when demand catches up with supply, local processors need to bid higher to coax grain into the market.

Basis strategies at harvest

Harvest may be the most critical time to be aware of the basis at your local elevator. Find out if it is weaker, stronger or about even with average. Sources of information on local basis patterns include an elevator manager, commercial marketing advisors, or an extension economist at a land-grant university.

"Seasonally, basis levels are weakest at harvest," says George Flaskerud. "For wheat, this year looks to be no exception."

Cash wheat prices this harvest have been pressured by last year's grain coming into the market as it is redeemed from the loan, explains Oja.  "Space needs to be freed up for harvest. This has resulted in increased available supplies, which has weakened the basis."

        Picking the Proper Marketing Tool

Once you know where your basis stands in relation to the futures market, you can adjust your marketing strategies accordingly.  Some basis scenarios and possible strategies:

Weak basis/Weak futures: In this situation, traders advise that you sit tight and look for improvement in both the basis and the futures price. It's the perfect situation for storage.

Weak basis/Neutral to strong futures: This situation calls for a storage hedge, experts say. That is, look to lock in a futures price and let the basis float. Selling deferred futures and storing grain is one way to do this.

Strong basis/Weak futures: This situation calls for options. Sell your grain to capture the basis strength and replace the cash grain with a call option to capitalize on any rally in the futures price.

Strong basis/Neutral to strong futures: This situation has developed in the past, especially when there is a short crop.  This is one of those occasions when you can sell your grain off the combine.

 

Basis Basics

Basis is simply the difference between the futures price and your local cash price.  Transportation and local supply and demand influence basis levels.  The basis is seasonally weakest at harvest.  The local elevator, extension service, and commercial market advisors are resources for historical basis patterns.

Example:

If: Your local elevator price that day is $3.00 per bushel
And: The Mpls Sept. spring wheat futures price on a given day is $3.25 per bushel
Then: Your local basis is 25 cents per bushel under the Mpls. Sept. Contract (minus 25, or 25 under.)
So What? Knowing when your local basis is stronger and weaker can help you time grain sales and select appropriate marketing tools.

Using basis knowledge to your advantage

Here's a hypothetical example that may help you determine what marketing strategy you should use at harvest.After doing some research, you discover that your average basis on September 15 is 25 cents under the futures contract. The wheat crop is harvested and you check the local elevator. They quote a flat price of $2.90. The Minneapolis September futures price is $3.25.Doing the math, you realize the basis is weak: it's 10 cents per bushel less than average.As a result, you store the crop and sell December futures, which happen to be $3.40.By mid-November, the basis has improved to 20 cents under the Minneapolis December contract, which has slipped to $3.30. You sell the stored wheat to capture the basis appreciation and buy back the futures contract.

The result: Implementing this strategy captured a price of $3.20, minus storage and interest. Selling at harvest would have brought a price of $2.90. ..

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.