Basis is the difference between the cash price paid for your grain and the nearby Chicago Board of Trade futures price. Basis is often called "the voice of the market" because it's an indication of whether or not the market wants your grain.
A narrow or improving cash basis is a signal that the market wants your grain. This improvement often happens right after the crop has been put away, or in spring when everyone is busy in the field and no one is making cash grain sales.
A wide or widening cash basis is often a signal that the grain market doesn't want your grain. In this case you should hold your grain and avoid making cash sales. Remember, if you're a farmer who understands merchandising, you make two decisions when you price your grain. One is choosing the futures price that you are satisfied with and the other is locking in the basis level. For a complete review of your marketing alternatives, review pages 76-77 of the mid-February Soybean Digest.
Why is basis wider in the western Corn Belt than in the eastern Corn Belt? The major component of basis is the cost of transporting corn and soybeans to a delivery point in Chicago or on the Illinois River. Customers in both Will and Kankakee counties in Illinois often have a basis that is 0 or 10 cents under the Board of Trade futures price because they're close to the delivery points.
In the western Corn Belt, where I grew up and where I currently own farmland, there are basis bids as wide as 70cents below the futures price and we're happy to lock in a bid that is just 30cents under. Soybean Digest readers who plot their basis are in a wide geographic area and should study the cash basis bids in the previous two to three years, if possible, to determine the basis patterns that are normal for their areas.
Four key factors make up basis:
1) The cost of transporting the product to market. Barge and rail rates change each day, and this year, with higher fuel and labor costs, transportation costs are increasing. Because of that, the basis level at many locations is widening.
2) The cost and availability of storage. Parts of the western Corn Belt had another bumper crop last year. Many elevators ran out of storage and widened their basis because they did not want to put more grain in piles outside. If a large crop results in a shortage of storage space, the basis will widen. If the crop is smaller than expected, like in many areas in the eastern and southern Corn Belt last year, the fall basis holds much better than in other years.
3) The relative price level of grain. When futures rally, it's more difficult for basis levels to improve since many cash sellers will move the grain a t the higher price level. If the crop is large and futures prices are low, like last fall, basis levels won't stay wide for an extended period.
4) Local demand and transportation availability. Last fall, cash corn bids sometimes varied by as much as 20cents/bu in the same western Corn Belt county. The hot bids were usually from feed companies loading up with cheap cash corn or from elevators loading unit trains. The cash bids on the upper Mississippi soared dramatically from mid-October to mid-November as terminals and processors bid aggressively to buy corn and soybeans before the river froze up.
How can you use basis to make better marketing decisions? * First, be aware of your basis and take the time to make a basis chart for your area. Many elevator managers and grain brokers have this information available and can help you understand the pattern in your area.
* Second, once you're aware of when basis levels are likely to be lousy and when they're likely to be good, you can avoid the bad basis periods and make cash sales when basis levels improve.
* Third, avoid harvest sales whenever possible. If you are in a storage or cash flow position that requires you to always make sales at harvest, plan ahead and make sales during spring and summer. Sales made right off the combine are usually made at the worst basis and lowest futures price. If you market your grain on a wide basis there is no way to make it back in the futures or options market.
* Fourth, run your farm as though it were an elevator. Be aware of the futures market and the carrying charges (higher bids for future delivery of grain) that are present in the market. By evaluating the carrying charges in the futures market and the basis bids that you have in the current cash market and for future delivery, you can often see the best time to merchandise the grain.
Time spent studying your local basis pattern and using that pattern pays big dividends. The futures market is very volatile and difficult to forecast, whereas the basis pattern is similar every year.