ECON 337:
Agricultural Marketing
Chad Hart
Assistant Professor
chart@iastate.edu
515-294-9911
Econ 337, Spring 2012
Basis
Basis = Cash – Futures
Futures reflect global supply and demand
Basis reflects local supply and demand
Cash = Futures + Basis
Econ 337, Spring 2012
Basis Basics
Specific to time and place
Typically use nearby futures
Convergence
Less variable than cash prices
Relatively predictable
Econ 337, Spring 2012
Basis Factors
Relative storage capacity
Transportation availability and cost
Time to expiration
Quality issues
Econ 337, Spring 2012
Basis Terms
Econ 337, Spring 2012
Interior Iowa Daily Grain Prices
http://www.ams.usda.gov/mnreports/nw_gr110.txt
Closing cash grain bids offered to producers as of 2:30 p.m.
Dollars per bushel, delivered to Interior Iowa Country Elevators.
US 2 Yellow Corn Prices were generally 5 to 8 cents higher for a state average of 5.91.
US 1 Yellow Soybean Prices were mostly 10 cents lower for a state average of 11.31.
Iowa Regions
Northwest
North Central
Northeast
Southwest
South Central
Southeast
#2 Yellow Corn
Range
Avg
5.88 – 6.06 5.94
5.83 – 5.96 5.89
5.72 – 6.05 5.88
5.84 – 6.03 5.91
5.86 – 6.04 5.92
5.83 – 6.01 5.92
#1 Yellow Soybeans
Range
Avg
11.29 – 11.42
11.33
11.21 – 11.29
11.26
11.09 – 11.45
11.27
11.27 – 11.52
11.39
11.14 – 11.50
11.27
11.22 – 11.66
11.45
Corn basis to STATE AVERAGE PRICE for the CBOT Mar. contract is -.21
Soybean basis to STATE AVERAGE PRICE for the CBOT Mar. contract is -.56
Econ 337, Spring 2012
Specific to Time and Place
Econ 337, Spring 2012
Average Iowa Corn Basis, 2006-10
-0.10
-0.20
$ per bushel
-0.30
-0.40
-0.50
-0.60
-0.70
December
Econ 337, Spring 2012
March
May
1
7/
1
6/
1
5/
1
4/
1
3/
1
2/
1
1/
12
/1
11
/1
10
/1
-0.80
July
Source:
http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Iowa Corn Basis, May Futures, 2006-10
-0.10
-0.20
$ per bushel
-0.30
-0.40
-0.50
-0.60
-0.70
-0.80
Average
Econ 337, Spring 2012
Min
5/12
4/28
4/14
3/31
3/17
3/3
2/18
2/4
1/21
1/7
12/24
12/10
11/26
11/12
10/29
10/15
10/1
-0.90
Max
Source:
http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Iowa Corn Basis, May Futures, 2006-10
-0.25
-0.27
-0.29
$ per bushel
-0.31
-0.33
-0.35
-0.37
-0.39
-0.41
-0.43
Econ 337, Spring 2012
SC
12
5/
5
5/
SW
28
NE
4/
21
4/
NC
14
7
4/
31
NW
4/
Iowa
3/
24
3/
17
3/
10
3/
3/
3
-0.45
SE
Source:
http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Basis Information
ISU Extension and Outreach, Ag Decision Maker
Corn http://www.extension.iastate.edu/agdm/crops/html/a2-41.html
Soy http://www.extension.iastate.edu/agdm/crops/html/a2-42.html
Cattle http://www.extension.iastate.edu/agdm/livestock/html/b2-42.html
Hogs http://www.extension.iastate.edu/agdm/livestock/html/b2-41.html
USDA-Ag. Marketing Service
http://www.ams.usda.gov/mnreports/lsddgr.pdf
http://www.ams.usda.gov/mnreports/nw_gr110.txt
Local elevators, ethanol plants, processing plants, etc.
Econ 337, Spring 2012
Basis and price forecasting tool
Enter specific information
Location
Date
Weight
Frame score and grade
Sex
Number
Econ 337, Spring 2012
Grain Basis vs. Livestock Basis
Grain is a storable commodity and the same
grain can be used to satisfy several futures
contract delivery months. So grain futures
prices tend to be tied to one another.
Livestock is not storable so livestock futures
prices for alternative delivery months tend to
move independently.
Because grain is a storable commodity, the
grain basis is tied closely to grain storage costs
and interest costs. Livestock are not storable so
there are no storage costs built into the basis.
Econ 337, Spring 2012
Grain Basis vs. Livestock Basis
An inverse basis in grain futures (cash above
futures) is unusual and indicates there is
something amiss in the grain industry (lack of
transportation, for example). An inverse basis in
grains will usually last only for a short period.
An inverse basis in livestock futures is not
unusual for distant delivery contracts and can
exist for extended periods of time. Only during
the nearby futures contract delivery periods do
we expect livestock futures to be above cash
price.
Econ 337, Spring 2012
Convergence
13.50
13.30
13.10
$ per bushel
12.90
12.70
12.50
12.30
12.10
11.90
11.70
Futures
Econ 337, Spring 2012
Cash
11/1
10/1
9/1
8/1
7/1
6/1
5/1
4/1
3/1
2/1
1/1
11.50
Convergence Issues
Typically, as futures contracts reach maturity, futures
price and cash prices at delivery points tend to
converge to the same level.
For several grain and oilseed futures contracts over
the last few years, this has not occurred.
“Poor Convergence Performance of CBOT Corn,
Soybean and Wheat Futures Contracts: Causes
and Solutions”
Scott Irwin, Philip Garcia, Darrel Good, and Eugene Kunda
University of Illinois, March 2009
Econ 337, Spring 2012
Why Is Convergence An Issue?
1. Non-convergence indicates the market is out-ofbalance.
“When a contract is out of balance the disadvantaged side
ceases trading and the contract disappears.”
(Hieronymus, 1977)
2. Non-convergence adds to the uncertainty in basis
and limits hedging effectiveness.
Econ 337, Spring 2012
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Factors
The relationship between the spread between
futures contracts and the cost of carry (think
storage costs)
In the settlement process for corn and soybean futures,
the delivery instrument is a shipping certificate.
If it is advantageous to the holder of a shipping
certificate, they can delay delivery and effectively store
the grain, paying CBOT set storage costs.
Structural issues related to the delivery process
Does the general trade flow of the commodity line up
with the possible delivery points under the futures
contract?
Econ 337, Spring 2012
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Delivery Points
How much of the commodity is
moving through the delivery point
areas?
Corn
Econ 337, Spring 2012
Soybeans
Wheat
Source: Irwin, Garcia, Good, and Kunda, 2009
Marketing and Outlook Research Report 2009-02
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2012/
Lab in Heady 68 this week
Econ 337, Spring 2012
