National Corn Index Basis Hedge Effectiveness
Regardless of the strategy the hedger chooses to follow, a futures contract is only an effective
hedge vehicle if its price tracks the price of the physical commodity exposure.
Generally, producers and consumers do not sell and buy ‘Chicago Board of Trade (CBOT)’ corn,
they sell and buy 'local’ corn. The National Corn Index (NCI) tracks local prices more closely than
CBOT Corn contract, and thus can be a better hedge.
The NCI spread vs. local prices has historically traded in a significantly tighter range than the
nearby CBOT Corn futures vs. the same local prices. For example, over the past six years, the
Omaha Nebraska Cash (ONE) - NCI spread has varied 23.81 cents (11.33 to -12.38) while the
ONE - CBOT spread has varied by 53 cents (-1.25 to -54.25). The stability of the NCI basis and
corresponding reduction in basis risk is clearly visible in Figure 1 below.
Corn Basis Levels, 1999-2005
20
10
Cents per Bushel
0
-10
-20
-30
-40
-50
Month
ONE NCI
5/1/2006
1/1/2006
9/1/2005
5/1/2005
1/1/2005
9/1/2004
5/1/2004
1/1/2004
9/1/2003
5/1/2003
1/1/2003
9/1/2002
5/1/2002
1/1/2002
9/1/2001
5/1/2001
1/1/2001
9/1/2000
5/1/2000
1/1/2000
9/1/1999
-60
ONE CBT
Figure 1: Omaha Nebraska Cash (ONE) vs. NCI and CBOT Corn
The basis stability of the NCI can be demonstrated with any cash market. Against North Central
Iowa Cash (NIA), the NCI spread has traded in a 17.19 cent range while CBOT corn has deviated
by as much as 40 cents from North Central Iowa Cash prices (Figure 2). Against Central Illinois
Cash (CIL), the NCI spread has varied a total of 22.10 cents while CBOT corn has varied as
much as 35.25 cents (Figure 3)
© 2005 Minneapolis Grain Exchange
Month
CIL NCI
30
20
10
0
-10
-20
-30
-40
9/1/2005
5/1/2005
1/1/2005
9/1/2004
5/1/2004
1/1/2004
9/1/2003
5/1/2003
1/1/2003
9/1/2002
5/1/2002
1/1/2002
9/1/2001
5/1/2001
1/1/2001
9/1/2000
5/1/2000
1/1/2000
9/1/1999
5/1/2006
Corn Basis Levels, 1999-2005
5/1/2006
Figure 2: North Central Iowa Cash (NIA) vs. NCI and CBOT Corn
1/1/2006
NIA CBT
1/1/2006
9/1/2005
5/1/2005
1/1/2005
9/1/2004
5/1/2004
1/1/2004
Month
NIA NCI
9/1/2003
5/1/2003
1/1/2003
9/1/2002
5/1/2002
1/1/2002
9/1/2001
5/1/2001
1/1/2001
9/1/2000
5/1/2000
1/1/2000
9/1/1999
Cents per Bushel
Cents per Bushel
Corn Basis Levels, 1999-2005
0
-10
-20
-30
-40
-50
-60
-70
CIL CBT
Figure 3: Central Illinois Cash (CIL) vs. NCI & CBOT Corn
© 2005 Minneapolis Grain Exchange