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BASIS
Basis is the difference between the futures market and
the cash market, and is expressed as: Basis = Cash Prices – Futures Prices. Basis
exhibits a pattern throughout the year more predictable than the futures contract prices,
and thus can be used with more accuracy to gain higher selling prices. To view Current Basis Analysis, click on the link.
1. How do you Calculate Basis? Basis is calculated as: Cash – Futures = Basis. If your cash price is $2.60 and futures are trading at $2.85, your basis is –25c ($2.60 - $2.85 = -25c). 2. What does Basis Tell You? Basis can indicate how much demand there is for cash grain from merchandisers. When basis is high or strong, merchandisers need cash grain. To get it, they bid up the basis to be more positive (and raise cash prices) which is the reason for a strong or high basis. When basis is very strong or high relative to futures markets, the market is telling you to sell your grain (generally its also a sign of a bullish market – especially if basis is abnormally high). Strong basis is a good opportunity to sell cash grain, and potentially to re-own on futures or options (depending on the price outlook). 3. How do you use basis to formulate marketing plans? The best way to use basis is to look at historical charts of basis and use them to estimate what basis will be in the future (1 month from now, 3 months from now, 8 months from now, etc). By estimating basis and using the appropriate futures month, you can make an estimate of what cash prices will be in the future. Once you have an estimate, you can then determine the best time to sell. You can use that information to calculate returns to storage. making money on basis) is to own the cash grain during periods of basis improvement. We cannot emphasize enough the importance of selling cash grain when the basis is strong. For more information, click on Marketing Strategies at this link. 4. Historical Basis Patterns. This shows basis patterns by crop for various locations in each state. For more information on basis, click on the appropriate state links: ND Extension Marketing Publications South Dakota - Weekly East River Grain Basis Report Iowa - Live Cattle Basis (IA/S. MN), Western Cornbelt Lean Hog Basis, Livestock Marketing Specialist Links, Corn/Soybean Basis, Grain Marketing Specialist Links, Other IA Farm Managment publications Illinois - Regional Corn/Bean Basis Other States Basis - See Wiz University Basis Links 5. Calculating Returns to Storage. By combining basis with current futures spreads, you can calculate the expected returns to storage if you know your storage costs. In order to guarantee those returns to storage, however, you must execute a futures hedge or buy a put to execute a minimum price contract. Generally, returns to storage 2-3 months after harvest are negative for elevator stored grain due to the high cost of elevator storage (3c/bu/month). This is why we typically recommend selling all elevator stored grain within 3 months of harvest. For grain stored on-farm, 90% of the time we recommend selling it at least 1-2 months before the next harvest due to sharp seasonal declines in futures prices and basis the two months preceding harvest. Storage Carrying Costs Viewer - click here to view a Progressive Ag storage costs calculation. Storage Carrying Costs Calculator Spreadsheet - click here to download a spreadsheet to calculate your own storage costs (Designed by Dr. George Flaskerud, ND Extension Marketing Specialist). Returns to Storage Viewer (PDF file) - click here to exhibit a returns to storage calculation by Progressive Ag. Returns to Storage Spreadsheet Calculator - click here to download a spreadsheet to calculate estimated returns to storage (Designed by Dr. George Flaskerud). How to use spreadsheets to calculate Storage Costs and Returns to Storage click here to see how to use the spreadsheets to estimate storage costs or carrying costs and the methodology behind the spreadsheets outlined above.
6. Other Interesting Links on using Basis to Calculate Expected Returns to Storage Marketing Strategies Using LDP's - click here to go to IA State Univ. site to evaluate different marketing strategies using storage and LDP's. For a software program which calculates the costs of storage, click on "Crop Storage Decision Program" at http://web.aces.uiuc.edu/farm.doc/finance/business.html For the Univ. of Illinois/Ohio AgRisk Software Program, go to http://www-agecon.ag.ohio-state.edu/agrisk/about.htm Illinois Soybean Cost of Carry Indicator/StratSoy
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Questions? Email us at ProgressiveAg.com
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