The world runs on America’s grains, and that holds true for people and livestock. When farmers sell their grain products, such as soybeans, corn or wheat, they rely on grain basis prices. The same holds true for plants purchasing these commodities. The basis is the difference between the spot or cash price, and the futures market price, for future delivery when the grain arrives delivered at a specific place and time. The entire grain industry, from farmers to processors, along with commodities and futures traders, look to the basis.
TL;DR (Too Long; Didn't Read)
The basis price, or the difference between the spot / cash price and futures market price, is used as a foundation for much of the grain market action today,
Grain Contract Basics
Farmers want to sell their grains at the most profitable price. Grain prices are established in two different markets. Futures contracts are traded via a commodity exchange for a certain delivery month. The Chicago Board of Trade, where these commodities are traded, is part of the Chicago Mercantile Exchange. Contract specifications are the same for wheat, corn and soybeans, and all of these crops receive a grade for type and quality. All grains are traded in bushels, with control prices quoted as cents-per-bushel.
A futures contract involves 5,000 bushels, and these contracts are quoted as price-per-bushel. The second market involves the cash market, and that is where the actual grain is handled, whether at an elevator, processor or in the case of corn, ethanol plants. If the cash market is a bid of $3.00 per bushel, and the futures price is $3.25, the local basis is then 25-cents-per-bushel or the difference between the two.
It is important to consider both components when understanding grain market prices. Farmers follow basis prices to determine the best times and places to market their grains.
Strengthening and Weakening
Grain basis prices can go up or down, like any commodity. When the basis heads into positive territory, it is strengthening. When the basis becomes negative, is it weakening. The former occurs when spot prices increase as per futures, and the latter involves spot prices lowering as per futures. When the basis is strengthening, that indicates either a strong local demand or insufficient local supplies.
When the basis is weakening, that means local demand is not strong, or there is an oversupply. In the grain market, strengthening and weakening may change quickly or take place over time.
Factors Affecting Grain Prices
What affects the difference between the local price and the futures price? There are several, including supply and demand, transportation costs, geographic variants and storage charges. For example, farmers sell the bulk of their grains at harvest time, so cash prices will decline during that period. However, that doesn’t affect futures prices. In the spring, during planting season, supply is lower so cash prices are higher. Again, the futures price is not affected.
- Commodity trading is highly leveraged and losses can add up fast. Only trade with money you can afford to lose.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.