The Basis Trader's Rules

I ran across this in my favorites folder the other day.  I thought it a worthy reminder of how being successful in the grain elevator business is achieved by staying true to a few simple principles.

It is not of my design; it is the brainchild of five very successful grain elevator business owners who meet up a couple times a year to share ideas and experiences related to their common business interests.  They developed this list in a get-together several years ago in an effort to drill down to what they see as the essential principles and activities that keep their businesses successful.

Thinking back to when they first shared this at a White Commercial Master Management Conference some 10+ years ago, I find these Rules just as vital today as they were back then – if not more so.


The Basis Trader's Rules

  1. We are in the grain business and we are basis traders.

  2. Futures are used only to fix the basis on a grain transaction and futures spreads are used only to connect purchases to sales or sales to purchases.
  3. Basis ultimately follows the market structure; thus, we must develop the skills to trade the basis curve both up and down.
  4. Space and services have value . . . we must not give away control of our space, services, or margins to others.
  5. Deal with all customers (buyers and sellers) in a manner that is fair for everyone involved.
  6. Have a plan with self-imposed limits.
  7. Cash is king - protect and grow working capital.
  8. Have a clear understanding of the numbers:
    a. financials and accounting
    b. positions and exposure
    c. mechanics of basis trading
  9. Rid our minds of market noise and other distractions that are counter productive to the mission (see rule #1).
  10. Get involved and network with other disciplined basis traders.

Topics: Basis Trading, Spreads, Grain Merchandising