Potential Basis Scenarios

Basis is the difference between the futures price of a commodity and the cash price. It is a simple equation: Cash price minus futures price equals basis.

What’s happened…

In windows of tight supply, strong demand, or both, basis can strengthen. That has been the case over the last couple of years in the corn and soybean markets. Basis can also be reflective regionally as well. As an example, basis in the western regions of the Corn Belt has been strong the last two years due to dry conditions limiting production. End users have had to pay more to encourage farmer selling or to pay higher transportation costs to haul corn from a longer distance.

This summer, a poor export market, competition from Brazil, and expectations of a big crop have had basis levels sliding, returning in some areas to levels that are considered more normal. Expectations that most of the Corn Belt will experience universally good production is keeping pressure on prices, as end users have adopted a buy-as-needed approach. A big discount of 2023 futures prices to 2022 crop prices likely infers farmer selling for new crop has been less than normal this year.

Why this is important…

Could basis weaken into harvest? This year, the likely answer is yes. Producers could become price-takers for several reasons: 1) the slow export pace; 2) concerns of low water levels in rivers flowing south; 3) farmers who may not have enough storage may need to sell at harvest. This all suggests that buyers will buy at a lower cash price. It is not unusual to expect basis to improve as prices drop and farmer selling slows. This fall could be different if yield potential holds up.

What can you do?

Prepare yourself. As a producer, check with your buyer for current bids, and ask if they believe basis will get weaker. If yes, then consider a basis contract or forward contract. Storage is an alternative if you believe cash will gain on futures. However, if storing (especially commercially), measure the cost of storage against the expected gains in cash price and/or basis. If storing is not a clear option, selling and buying futures may be an alternative for maintaining ownership. By doing so, you eliminate basis risk (and potential) and storage cost. Keep in mind that owning futures has margin requirements, commissions, fees, and market risk. Weigh all your alternatives carefully and use math to help guide you. Make sure you understand the risks and opportunities before entering into any strategy.

Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.

The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

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Bryan Doherty