How the Basis Tool is Used in Ag Marketing
Key User Data:
- In the Ag business, Basis is defined as the difference between the local cash price for corn or soybeans and the price for the same underlying commodity trading on a futures exchange.
- The local cash price for a crop is the actual price received for the crops sold, and the price of the commodity future on the exchange is the price for the underlying commodity delivered at some time in the future.
- The difference between the cash market price and the future delivery price is referred to as the Basis.
Basis helps grain producers, consumers, processors, traders, and distributors make informed decisions about buying and selling crops.
How to Calculate Basis
To determine the basis of a commodity, compare its local cash price to its future price.
Find out the price of corn, soybeans, or wheat in your area. You could call local elevators or use a quote service that reports live pricing.
Do the same for the futures market for the corresponding commodity. First, check commodity exchange prices, such as the Chicago Board of Trade (CME Group), or you can call a commodity broker.
To calculate the Basis, subtract the local cash price from the futures price. For example, if the local cash price for corn is $7 per bushel and the closest CBOT corn futures contract is trading at $6.50 per bushel, the Basis is +0.50 per bushel.
A positive basis indicates that the local cash prices are higher than futures prices. This could indicate that the commodity is in short supply or has a greater demand for it.
A negative basis indicates that the cash price in the local market is less than the futures prices. This could indicate an excess of goods in the local market.
Does the Basis Change Day to Day?
It can. The price of a commodity future varies daily due to a wide range of factors. Some factors may include, but certainly are not limited to, weather events, geopolitical events, and macroeconomic data releases. In addition, local prices can be affected by supply and demand events, transportation costs, and storage rates, among others.
Due to the above, it would be prudent to look at the four-week and nearby Basis to view things more clearly over the longer term.
Some even choose to keep a database of Basis changes for historical reference and the development of a coherent ag marketing program.
What is Nearby Basis?
“Nearby Basis” is the difference between the local cash price and the nearest futures contract of the same commodity—for example, corn, soybean, and wheat.
Let’s use an example. Corn is trading at $7.25 per bushel at a local grain elevator, and the commodity futures price is $6.75. This means the nearby Basis trades at a $0.50 basis per bushel premium at the local elevator versus the exchange. This is a positive premium.
- Positive Premium, the cash price, is above the commodity futures price.
- Negative Premium the cash price is below the commodity futures price.
Can Farmers and Growers Use the Nearby Basis Tool to Make Decisions?
Yes, typically, growers can use the nearby basis tool and info as a decision-making tool to increase efficiency in their operation.
- Identify whether they want to sell the crop at a premium.
- Assess whether to lock in the commodity futures price for future delivery.
- Evaluating cash flow and enabling risk management strategy as tools.
What is the first-week Basis?
First-week Basis is the Basis during the month’s first week and the corresponding futures price for that commodity. This is not a rule, but many believe that the first week of the month can provide insight into market trends and direction. The underlying thought is that prices will adjust most readily within the first week of trade as local and futures markets interact with one another.
Weather conditions, crop yields, and demand can influence the first week’s trade. Some growers may use this information to buy or sell their soybeans, corn, or wheat; others may decide to buy or sell futures contracts.
The first week could be used as a benchmark correlation between the cash market and the futures market and whether the cash market is stronger or weaker than the futures market. This can help buyers to evaluate if they should purchase, and growers to decide the best time and pathway for them to sell the underlying commodity.
What is the four weeks basis?
The “four weeks basis” is the difference between the local cash price for a commodity and the futures price over four weeks.
A 4-week period could indicate a longer-term trend and serve as a complimentary basis tool along with the first-week Basis. This may uncover shorter and longer-term trends, especially if their Basis coincides and converges.
A grower that sees that the four-week Basis has been negative may decide to store the crop, hoping for better market conditions.
On the other hand, if the Basis is positive, the farmer or grower may decide to sell their crop as soon as possible, attempting to take advantage of the cash market’s strong near term pricing.
A longer-term basis outlook could help evaluate trends such as:
- Changes in supply and demand
- Influence of weather
- Costs of transportation and logistics
- Storage capacity
The Importance of Projecting Basis
Suppose you are a farmer, grower, or anyone exposed to revenue fluctuations because of Basis. In that case, you must use a Basis tool that would help you evaluate how your sales and revenue could look under different scenarios over different time frames.
Let’s dig deeper and see why having a report of different basis scenarios is important.
In addition to the points we mentioned above (sell, lock prices, and manage risk), projecting Basis could also:
- Create different storage options
- Project revenue and cost.
- Plan production according to the expected market condition
- Evaluate and develop cash flow strategies
Confused? Speak with a Grain Basis representative. They can help you run various basis scenarios and determine the effects of various basis differences on your grain marketing. Instead of preparing for ag marketing at the last minute, we believe it’s better to have a few possibilities or scenarios in mind ahead of time. Contact your representative today via this link for more information: https://grainbasis.com/contact/
Conclusion
It is important to understand how these values move if you are exposed to grain prices, whether a producer (farmer) or the buyer (grain elevator/ethanol plant/livestock feeder). Knowing the basis for corn, soybean, and wheat may allow you to sell your crop at higher prices or buy them at lower prices.
Calculate different Basis scenarios and see first-week and four-week baselines to help manage risk while calculating costs and project pricing.
It’s important to remember that the Basis is one of several factors that affect grain prices. When making strategic decisions, consider all aspects of your business.