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 Northern Plains.  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 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.

Online sources for basis info in the Northern Plains:

www.abs.sdstate.edu/agecon/SDBasisCharts.pdf --Weekly basis values from 1997-2000, compiled by South Dakota State University. (Adobe Acrobat Reader is needed to read the portable document format (PDF). The software can be downloaded free from
www.adobe.com/products/acrobat/readermain.html ).

www.smallgrains.org/Toolshed/toolshed.htm -- Basis charts for selected locations in North Dakota and Minnesota, compiled by Toolshed, a service coordinated by the Minnesota Wheat Research and Promotion Council.

www.apec.umn.edu/faculty/eusset/ -- Historical basis charts for selected locations in Minnesota by Ed Usset, grain marketing specialist for the University of Minnesota’s Center for Farm Financial Management.

www.montanamarketmanager.org/ -- Montana Grain Growers Association marketing and risk management web site.

More basics on the basis can also be found in the North Dakota State University Extension 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.