Basis is the difference between a cash or local price for a commodity and the futures price of a particular commodity on a given futures exchange. Tracking basis at local elevators can be useful to producers in managing basis risk.
Area and regional basis information is available from the University of Arkansas Cooperative Extension Service and the USDA Agricultural Marketing Service. Using information from these sources is an excellent way to evaluate basis contract offers or basis-lock decisions on hedge-to-arrive contracts.
Basis information provided by the University of Arkansas Cooperative Extension Service can be found at http://www.aragriculture.org/marketing/default.htm under the heading “cash market prices.”
New crop and three-year average basis information is available for corn, rice, soybeans, and wheat. North Delta cash basis information is available for cotton.
Information on this site is updated biweekly and generally provided for four delivery locations.
Basis information provided by the USDA Agricultural Marketing Service can be found at http://marketnews.usda.gov/portal/lg under the heading “custom reports.” Grain basis information is located in the drop-down menu box.
Both current and historical new crop and cash basis information is available for soybeans, corn, grain sorghum, and wheat. Basis information is provided for 15 locations in Arkansas and Memphis, among others. Data from this site can be downloaded in Excel format.
Comparing current basis offers to a historical average may help in determining whether basis offers are good or bad. However, compared to historic values (i.e. three-year average), new crop basis levels today for all grains are abnormally wide or negative.
For example, during the first week of June 2008 at Memphis delivery terminals, new crop corn basis was 55 cents under September '08 futures versus a three-year average of 15 cents under during the same week.
At the same location, new crop soybean and wheat basis was 70 cents and $1.85 under respectively. The three-year average basis for these crops during the first week of June is near 25 cents under at this location.
From these examples, it is easy for grain producers to determine whether today's basis levels are good or bad.
Knowledge of historical basis values at a local elevator can be of little relevance in today's volatile market environment. A producer's time might be best spent considering the dynamics and fundamental factors at work in individual commodity markets.
As in the past, changes in the cost of transportation, demand, and availability of storage will affect basis bids. But, the emergence of commodity investment by index funds adds a new variable to basis determination. When investors choose to own a commodity in the futures market, the cash market still has to reflect the actual or “real” value of that commodity. When these two values differ, the difference is reflected in the basis.
Basis is having a dramatic effect on producer income. There are marketing tools available to help manage basis risk. Forward cash contracts, basis contracts, and hedge-to-arrive contracts are some examples.
With current new crop basis levels being markedly below historic levels, producers may find more value in following historic basis trends and seasonal tendencies in basis movement. This could assist producers in making better use of the marketing tools and products available.
For more information on the Web sites discussed in this article or commodity marketing, contact the me at (870) 972.2481 or [email protected].