www.cgb.com
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ERIN PARKS
CGB IP Origination and Grain Merchandiser www.cgb.com
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About Us
Zen‐Noh
Consolidated Grain and Barge Co.
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www.cgb.com
70 + strategically located facilities throughout the corn‐belt and along the nations inland waterways
Among the 6 largest U.S. grain companies
Storage capacity exceeding 160 million bushels
Annual grain volume typically exceeding 500 million bushels
Knowledgeable and experienced staff with an array of innovative marketing contracts Innovative value added solutions, such as Premium GrainsSM
Continued growth and expansion
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Facility Photo
Zen‐Noh
Consolidated Grain and Barge Co.
Jeffersonville, IN ‐
Grain Operations
www.cgb.com
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BASIS? WHAT IS THAT?
Who has heard of this term?
But what really is it? 7
University Definition Basis Is the difference between a cash price and the futures price of a particular commodity on a given futures exchange.
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Industry Definition of Basis Only Contract
Producer contract alternative that allow the producer to capture a strong basis and benefit from an increase in futures within the pricing time frame.
A very versatile marketing tool for the producer. 9
Stated As A Formula
• Basis =
• December Corn Futures
• Cash price – Futures • $4.52
price
• OR
• Cash Price =
• Futures price ‐ Basis
• Basis
• ‐26
• Local Price
• $4.26
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Another Example As A Formula
• Basis =
• January Bean Futures
• Cash price – Futures • $11.07
price
• OR
• Cash Price =
• Futures price ‐ Basis
• Basis
• +18
• Local Price
• $11.25
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What the – or + means
• The negative sign attached to a basis specifies that the cash price is less than the futures price ‐ what we call “under”
• The positive sign attached to a basis specifies that the cash price is more than the futures price – what we call “over” 12
Factors that Affect the Basis
• Supply and Demand
• Seasonality
• Location
• Crop Condition • Transportation
• Inverse Carrying Charge • Storage Availability
Market
• Industry Consolidation
• Uncertainty • Storage Costs
• Stockpiling
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Better or Worse Basis?
• If the corn production in a specific location is at a surplus will the basis more likely be better or worse?
• If the corn production in a specific location is at a deficit will the basis more likely be better or worse?
• If the wheat production in a specific location is highly damaged will the basis more likely be better or worse?
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Why Grain Producer Should Track Basis
• Manage Basis Risk
• Track All Potential Outlets
• Evaluate Storage Decisions
• Establish If A Basis is Good or Bad
• Compare to 5 year Average
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Example • Table for tracking basis
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Determining Factors of Basis at an Interior Elevator • Local Supply
• Size of local crop
• Values of end user the • Selling to high value elevator is selling to
• Availability of transportation
• Availability of storage
locations
• Does the elevator load rail or truck?
• Do they have grain pile? 17
2013 Corn Pile
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Determining Factors of Basis at an River Elevator • Export activity
• Is China buying?
• Barge availability
• Hurricanes, ice in the rivers, lock and dam issues
• Location on the river that • The more demand for figures tariff rates barges the more expensive they are
• Tariffs increase as you go up the river
• Freight rates
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Export Facility 20
Determining Factors of Basis at a Processor • Local Supply
• Is there enough supply to • Value of end products
fill their needs?
• Bourbon distillery, food or feed use
• Moisture, GMO purity, #1 grain
• Inbounds usually correspond with production
• Quality requirements
• Scheduled deliveries
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Contracting Options • If Basis and Futures are • Forward contract
acceptable • Nothing
• If Basis and Futures are unacceptable • If Basis is acceptable and • Basis Only contract
Futures are unacceptable
• If Basis is unacceptable • Futures Only contract
and Futures are acceptable
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Basis Only Contracts Conditions
• ADVANCE • On Jan 27th a producer did a corn Basis Only contract at +4H and took delivery, an advance of an advance using $4.44 70‐80% is available. cash. Advance amount should not exceed 90% of the • On Feb 14th the value value of the contract. If dropped to $3.99 so the producers has to because the futures decided price the dropped contract or deposit funds • Producer must decide into the account. what action to take
• After completing 23
Basis Only Contracts Conditions
• Pricing of a basis only can only be done during regular trading hours
• There will be charge to roll a basis contract from one option month to another
• To do this the basis will be adjust by the amount of the spread (the difference between the two futures months) and a service fee
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Basis Only Contract Benefits
• Risk of basis decrease is avoided
• Eliminate storage costs
• Delivery of grain can be made
• $ ‐ advance payment
• Potential futures price increase
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Basis Only Risks
• Knowledgeable on • Producer could be futures and basis levels
• Producers loses title of the grain
• Delivery is required
• Risk of futures prices going lower
subject to refund part of the initial advance
• Pricing must be done during trading hours
• Basis will be rolled if producer does not want to price by the notice day
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Example
• On Oct 10th the elevator price is $4.25 with December futures at $4.50. Basis is ‐25CZ. A 2500 bushel contract was written.
• On Nov 15th the futures is now $4.67. Basis Only contract is priced.
• What is the final price? 27
$4.42
• $4.67 Futures
• ‐.25 Basis
• $4.42 Cash
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Producer Perceptions
• A producer’s perception of what is acceptable or unacceptable for a futures price is determined by many factors and will vary for each producer.
• Production Costs
• Market
• But understanding basis can help a producer minimize the basis risk and determine the best market to sell to. 29
FOR ADDITIONAL
INFORMATION:
Please visit our website at: www.cgb.com
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