Facilitator’s Notes – Basis
AgVentures
Grain Marketing
Facilitator’s Notes
Basis
TIME ALLOWED: 45-50 minutes + discussion/questions
OBJECTIVE(S):
1. Understand the importance of basis in grain price risk management.
2. Know the importance of strengthening and weakening basis.
3. Understand how to keep and maintain basis records.
INSTRUCTIONS:
a) Read the document on basis that is given in the grains curriculum.
b) Collect the most recent Wall Street Journal futures and cash quotes for the grains.
c) Order the following publications directly from the CBT (Chicago Board of Trade) web
site to share with the seminar participants. These publications can be downloaded from
the web site or ordered by following the directions provided. (3-5 days needed to receive
the printed materials from the exchange. 25 copies or below can be supplied at free of
cost).
a. Web address: www.cbot.com
b. From the main page: go to the knowledge center and click on education.
c. Follow the directions from here.
d) The following publications are recommended.
a. Understanding Basis (English version). (This publication can be downloaded or
ordered)
b. A Home Study Course: Agricultural Options and Futures. (Need to Order)
c. Any other publications that you want to share with the audience should be
downloaded or ordered.
Slide 2:
Explain here what basis and the importance of knowing about the basis is to the producers.
Define: Basis is the difference between cash and futures price.
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Facilitator’s Notes – Basis
Now explain the importance of basis to the grain producers:
1) Knowledge of basis will help to estimate the net selling price at the end of a hedge.
2) Basis knowledge will help to make storage decisions.
3) Helps to compare and evaluate the quality of local grain bids offered by the elevators.
Slide 3 and 4:
What are the variables that determine the basis: List all the factors shown on the slides and
explain each. You can follow the example given in the basis document or use your own prices
collected to demonstrate the points given.
You can use the price quotes (cash and futures) that you collected from Wall Street Journal or
other sources to show the difference between the current cash price and nearby futures price and
current cash price and distant futures price. You should ask why these basis values are different.
The answers you should expect are: because of transportation costs, storage costs, interest
charges and insurance (costs of storage) i.e. because of the factors that influence the basis.
Slide 5:
Again, show here that the Basis = Cash – Futures. Tell the audience that some folks also
calculate the basis by taking the difference between futures price and cash price. But we will use
basis calculation (cash – futures) that most of the folks use in the industry.
Explain that basis forecasting is easier than price level (either futures or cash) forecasting. By
using the forecasted or estimated basis we can arrive at the expected cash price. Where expected
cash price equals the futures price minus expected basis. And also the success of a hedge depends
upon the basis patterns (strengthening or weakening). Tell them that the basis has predictable
patterns that will be shown and discussed shortly in another slide.
Slide 5:
Here, explain basis contains two important elements such as storage and transportation costs.
Hence, there are two types of basis: time basis and location basis. At the delivery point the
difference between the cash and futures price give the time basis and it will be equal to zero at
the end of contract maturity when the cash and futures prices are one and the same. Where as
location basis is given by the difference between the cash prices at the local market and the cash
prices at the delivery place. If the delivery needs to happen in Chicago this will indicate the
transportation charges between the local market to the final destination i.e. Chicago.
Slide 7:
Understanding the nature of basis behavior will help the success of a hedge. A basis can
Strengthen or Weaken.
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Facilitator’s Notes – Basis
Follow the discussion given in the basis document to explain the strengthening and weakening
basis.
Finally, emphasize that a short hedger wants strengthening basis and long hedger wants
weakening basis.
Slide 8&9:
Slide shows the predictable basis patterns from summer to spring time. Here assume that the
futures prices stay at the level shown with a straight line and the cash prices will weaken from
summer to fall harvest shown with the thick curved line. This makes the basis to weaken. Where
as following harvest the cash prices will typically strengthen into the springtime. What all this
means is that the basis widens into harvest and narrows during storage season.
Usually, the futures prices are above cash prices until contract maturity (This may be reversed in
inverted markets where the cash prices are greater than futures prices i.e. due to the strong
current demand for the product). At the time of contract maturity we expect both the cash and
futures to be one and the same and basis to be zero.
What effects (fundamental factors) the cash market will also affect the futures markets, so they
tend to move together. Some times one to one relationship exists i.e. as cash price goes up by one
cent the futures also goes up by one cent and most of the time this sort of one-to-one relationship
is not followed. But both the cash and futures prices move together because of the similar
fundamental (supply and demand) factors that influence both the series.
Slide 10:
Basis determines the success of hedge.
When we are hedging, we are able to limit the price risk but still are exposed to the basis risk.
(Explain here what is meant by basis risk: variability in the basis).
A short hedger wants strengthening basis where as a long hedger wants weakening basis.
Slide 11:
This picture will help us to understand the importance of storage costs that are the major
component of basis as we move away from fall harvest to spring or beyond.
Understanding the differences in basis using nearby and distant contracts will help the producer
to make storage decisions (You can also use the example given in the basis document to explain
how to make the storage decisions).
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Facilitator’s Notes – Basis
Let us take an example of corn storage hedge. This example explains how to lock in a storage
profit. These kinds of opportunities arise rarely in the market. But let us see the following
example how this works. See next slide.
Slide 12:
In the month of October the cash price for corn is $3.00 and the July futures are trading at $3.50.
From the basis records the estimated basis during the month of June is minus $.10 i.e. below July
futures. The storage cost is $0.30 per bushel to keep the grain until June. The forward price
offered is $3.40 ($3.50 minus $.10). A producer can enter into this forward contract and get
$0.10 as storage profit. He can also hedge in the futures market by selling July futures at $3.50
and buying back in the month of June when the futures prices are at $3.40. The cash price in June
is $3.30 that is 10 cents below the futures price as expected. By this short hedge the producer can
lock into the storage profit of 10 cents. The net price due to the hedge is $3.40 ($3.30 plus
$0.10).
These kinds of opportunities occur rarely in the market and a shrewd producer can lock into a
profitable storage profit whenever the opportunities arise.
Slide 13, 14, 15 & 16:
The next four slides show the Corn and Soybean basis in North West Wisconsin for selected
years as well as the average basis movements over these years. From these slides the participants
should be able to realize the seasonal patterns in the basis behavior that are predictable. The
basis is weak during the harvest period and it strengthens over the marketing year. When the new
crop arrives the basis will weaken again.
Slide 17:
Usually the basis will be calculated from the nearby futures price. But you should know and keep
records of the basis for the month that you normally market the product.
Introduce the audience here, how to create and maintain basis records. Please look at the
worksheet provided in the basis document.
Slide 18:
Where to get the basis information? Direct the audience to the sources listed on the slide.
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Facilitator’s Notes – Basis
Exercises
Exercise 1 – Basis Calculation
 Learn the mechanics of calculating a basis
 Observe the seasonality of basis
Notes: Remind the audience the formula for Basis = Cash price – Futures price.
Month
January
Grainville CBOT Corn
Corn Price Price
Corn Basis
2.06
2.38
-0.32
Grainville
CBOT Soybean Soybean
Soybean Price Price
Basis
4.8
5.14
-0.34
February
2.14
2.41
-0.27
4.99
5.21
-0.22
March
2.21
2.51
-0.3
4.99
5.29
-0.3
April
2.32
2.65
-0.33
5.05
5.41
-0.36
May
2.44
2.78
-0.34
4.96
5.38
-0.42
June
2.36
2.66
-0.3
5.24
5.66
-0.42
July
2.21
2.58
-0.37
5.05
5.51
-0.46
2.2
2.61
-0.41
4.89
5.37
-0.48
September
2.08
2.52
-0.44
4.77
5.21
-0.44
October
2.09
2.53
-0.44
4.48
5.06
-0.58
November
2.25
2.57
-0.32
4.96
5.18
-0.22
December
2.28
2.64
-0.36
4.97
5.29
-0.32
August
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Facilitator’s Notes – Basis
Notes: Ask the audience during what months the basis is weakest. The answer to this is during
the months of harvest the basis is weak and will start improving later. There is definite
seasonality to the basis behavior in the observed data.
Grainville USA Corn and Soybean Basis
Ja
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Fe ary
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M y
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Ap
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M
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Ju
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Au l y
Se gu
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N tob
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D mb
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0
-0.1
Basis
-0.2
-0.3
Corn Basis
Soybean Basis
-0.4
-0.5
-0.6
-0.7
Month
Calculate the corn and soybean basis for “Grainville USA” and plot the data on the graph.
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