1
Basis and Price Formation
Basis
Basis is the difference between a
cash price at a specific location
and the price of a particular
futures contract. The cash price
offered to a grain producer for
any given marketing strategy is a
function of local basis.
2
3
Determination of Basis
Major Factors
•
•
COST OF STORAGE: Determines basis
over a given crop year. Also affects the
price difference between a nearby and a
distant futures contract in a given crop
year.
COST OF TRANSPORTATION: Determines
basis geographically.
4
Determination of Basis
Other Factors:
•
Local supply and demand conditions
•
Grain quality
•
Intensity of local competition
5
Basis





Basis = Cash-Futures Price ( or Futures
- Cash Price)
Calculated From Nearby Futures (Cash Next Futures Contract to Mature)
Has Predictable Patterns (More
Predictable Than Cash Prices)
Not Perfectly Predictable (Basis Risk)
Determines the Success of Hedge
Strengthening and Weakening
Basis
Strengthen
(less negative or
more positive)
20
10
0
-10
-20
Cash prices increase relative to futures
prices
Weaken
(less positive
or more
negative)
Cash prices decrease relative to
futures prices
7
8
Typical Grain Basis Pattern
Futures Price
Weakening
Basis
Cash
Price
Summer
Strengthening
Basis
Harvest Basis
Largest
Fall Harvest
Spring
Predictable Basis
Patterns






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Futures > Cash Prior to Contract
Maturity
Futures = Cash Price at Contract
Maturity
Basis Widens Into Harvest
Basis Narrows During Storage Season
Futures and Cash Prices Move Together
Basis is Predictable From Year to Year
10
Hedging Principle
The Basis Determines
the Success
of A Hedge
11
Basis and Storage Costs
$
Futures Price
Basis
Storage
Costs
Fall Harvest
Spring
Cash
Price
P harvest
12
Corn Storage Hedge
Date
October
Cash Market
Futures
Market
Harvest Price = $3.00 Sell July Fut. = $3.50
Est. June Basis = $.10
Storage Cost = $.30
Forward Price = $3.50-.10= $3.40
Storage Profit= $3.40 -3.00 - .30= $.10
June
Cash Sale @ $3.30
Return to Hedge:
Buy Back Fut. @ $3.40
$3.30 + $.10 = $ 3.40
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Corn Basis for North West Wisconsin
-0.20
-0.25
-0.30
-0.35
-0.40
-0.45
-0.50
-0.55
-0.60
Sep
Oct
Nov
Dec
Jan
1997-98
Feb
Mar
1998-99
Apr
May
1999-00
Jun
July
Aug
14
Corn Basis for North West Wisconsin
-0.20
-0.25
-0.30
-0.35
-0.40
-0.45
-0.50
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Average
Apr
May
Jun
July
Aug
15
Soybean Basis for North West Wisconsin
-0.10
-0.20
-0.30
-0.40
-0.50
-0.60
-0.70
-0.80
-0.90
Sep
Oct
Nov
Dec
Jan
1997-98
Feb
Mar
1998-99
Apr
May
1999-00
Jun
July
Aug
16
Soybean Basis for North West Wisconsin
-0.30
-0.35
-0.40
-0.45
-0.50
-0.55
-0.60
-0.65
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
July
Aug
Recording Basis
17
To record historical basis levels, collect closing futures prices for the
contract closest to maturity (but not expiring in the current month) each
Wednesday, and the corresponding cash price (collected later
Wednesday or Thursday morning). Subtract the futures price from the
cash price. Average the Wednesday basis calculations for each month
to arrive at the average monthly basis level.
18
Finding Local Basis Information
•Compile it yourself over several years.
•Contact you local county extension office.
•Contact your local grain brokers, lenders,
market advisory services.