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Basis and Futures: Two Beasts with One Burden

Basis and Futures: Two Beasts with One Burden

Simply stated, the shared burden of both the basis and futures is to move grain. When these signals are interpreted correctly, this task is accomplished. The point of difference being who these signals are intended for.

It is widely recognized that futures represent an overarching, bird’s eye view of the supply landscape of a particular commodity for a defined period of time, while basis is a reflection of a more localized market’s demand for a certain timeframe. Now, while it is possible that these two market forces can trade in tandem, it is far more common for them to exhibit an inverse relationship. The key here is to understand what this all means and what it is telling the various participants in the market. Any seasoned grain merchandiser will have, at some point, had the basis talk in which the producer, wanting to talk basis instead of cash price, is offered two choices by the merchandiser. “Would you rather have +10 basis with $3 futures, or -40 basis with $4 futures?” Not to be condescending here, but we do not want our farmer customers hitching their wagon to the wrong beast. If he’s not actively hedging futures, basis is not where he is going to make his profit; cash price is.

Futures not only make up the bulk of the overall cash price, they also tend towards more overall movement (read: cash price opportunity) in a given span of time. These movements put out by the Board of Trade give clear signals to the cash seller, i.e. the majority of producers. An overall cash price rally of $2.00 should get the farmer’s attention and his bushels, no matter that is was made up of a $2.50 rise in the futures accompanied by a $0.50 drop in the basis. This is in contrast to the basis trading grain mechandiser, who looks for trading signals via movements in the basis over time (spreads), which tend to trade in a narrower range of movement when compared to the futures market. And since basis has a penchant for going up when futures drop (and vice versa), the likely overall resulting cash price wouldn’t be as attractive to the producer.

In these times of low cash prices, it is often tempting for our producers to look to something that will give them an edge in marketing their grain. And it is usually during these times of market downturns that all the “noise” of farm publications and marketing advisory talking heads go into high gear. It’s our job to keep our farmer customers focused on profit per acre, and this is not accomplished by chasing the basis. Hitched to the team of futures AND basis, the producer can ride the cash price wagon to another year of farming.

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