ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor
lschulz@iastate.edu
515-294-3356
Econ 337, Spring 2013
Chad Hart
Associate Professor
chart@iastate.edu
515-294-9911
Basis
Basis = Cash – Futures
Futures reflect global supply and demand
Basis reflects local supply and demand
Cash = Futures + Basis
Econ 337, Spring 2013
Basis Basics
Specific to time and place
Typically use nearby futures
Convergence
Less variable than cash prices
Relatively predictable
Econ 337, Spring 2013
Basis Factors
Relative storage capacity
Transportation availability and cost
Time to expiration
Quality issues
Econ 337, Spring 2013
Basis Terms
Econ 337, Spring 2013
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 mostly 4 cents lower for a state average of 7.41.
US 1 Yellow Soybean Prices were generally 5 to 6 cents higher for a state average of 14.55.
Iowa Regions
Northwest
North Central
Northeast
Southwest
South Central
Southeast
#2 Yellow Corn
#1 Yellow Soybeans
Range
Avg
Range
Avg
7.41 – 7.51 7.45 14.52 – 14.63
14.57
7.34 – 7.44 7.41 14.36 – 14.56
14.52
7.28 – 7.50 7.40 14.38 – 14.65
14.51
7.23 – 7.46 7.39 14.52 – 14.77
14.63
7.34 – 7.51 7.39 14.39 – 14.70
14.58
7.20 – 7.58 7.39 14.47 – 14.59
14.55
Corn basis to STATE AVERAGE PRICE for the CBOT Mar contract is + .05
Soybean basis to STATE AVERAGE PRICE for the CBOT Mar contract is -.19
Econ 337, Spring 2013
Specific to Time and Place
Econ 337, Spring 2013
Average Iowa Corn Basis, 2007-11
-0.20
-0.30
$ per bushel
-0.40
-0.50
-0.60
-0.70
-0.80
10/1
11/1
12/1
1/1
Dec
Econ 337, Spring 2013
2/1
Mar
3/1
May
4/1
5/1
6/1
7/1
July
Source:
http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Iowa Corn Basis, May Futures, 2007-11
-0.10
-0.20
$ per bushel
-0.30
-0.40
-0.50
-0.60
-0.70
-0.80
-0.90
10/1
11/1
12/1
Min
Econ 337, Spring 2013
1/1
Average
2/1
3/1
4/1
5/1
Max
Source:
http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Iowa Corn Basis, May Futures, 2007-11
-0.20
-0.22
-0.24
$ per bushel
-0.26
-0.28
-0.30
-0.32
-0.34
-0.36
-0.38
-0.40
3/4
3/11
3/18
Iowa
Econ 337, Spring 2013
3/25
NW
4/1
NC
4/8
NE
4/15
SW
4/22
SC
4/29
5/6
5/13
SE
Source:
http://www.extension.iastate.edu/agdm/crops/pdf/a2-41.pdf
Econ 337, Spring 2013
Econ 337, Spring 2013
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 2013
Basis and price forecasting tool
Enter specific information
Location
Date
Weight
Frame score and grade
Sex
Number
Econ 337, Spring 2013
Sex
Frame
Grade
Head
= Steer
= Lg & Med/Lg
=1
= 100
Econ 337, Spring 2013
Sex
Frame
Grade
Head
= Steer
= Lg & Med/Lg
=1
= 100
Econ 337, Spring 2013
Seasonal Price Patterns & Basis
 Period of increasing supplies, prices are expected to decline.
 Cash market reflects today's supply conditions and price.
 Futures market reflects upcoming conditions of expected larger
supplies and lower prices.
 Basis may be very narrow or cash price may be above futures.
 i.e., Hogs: mid-August to mid-September.
 Period of decreasing supplies, prices are expected to increase.
 i.e., Hogs: late-Dec and early-Jan against the Feb futures.
 Seasonal price period of relatively large supplies and low cash
prices, but the Feb futures contract reflects a delivery period of
expected smaller supplies and higher prices.
 Low cash prices and high futures translate into a wide basis.
Econ 337, Spring 2013
Threat of Delivery & Basis
 Hedgers can deliver on a futures contract.
 If enough producers deliver on futures contracts,
cash prices will tend to move up relative to futures.
 The threat of delivery tends to limit how wide the
basis will be during the delivery period.
 The variation in basis during delivery periods tends
to be less than during periods with no delivery
option.
Econ 337, Spring 2013
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 2013
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 2013
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 2013
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 2013
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 2013
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 2013
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 2013
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/
Spring2013/
Lab in Heady 68.
Econ 337, Spring 2013