Grain Basis is the difference between the price of a commodity in the local market subtracted from the price of the commodity in the futures market. Let’s use corn as an example. It is April 10th and a farmer in Fargo, ND has corn in the bin and wants to sell. His price at the local elevator is $4.50 per bushel. The front month for corn is May Corn and it is trading at $4.75 on the CBOT.
- Cash Price in Fargo, ND on April 10th is $4.50
- Futures price for May Corn on 4/10 is $4.75
- Basis = Cash – Futures
- Basis = $4.50 – $4.75
- Basis = -$0.25
The basis for this farmer in Fargo, ND is “25 under May” which means his cash prices is 25 cents under the May corn futures. When farmers talk about selling corn or when elevators and ethanol plants talk about buying corn, they typically talk in terms of basis.
When the basis is negative, the cash is lower than the futures, that usually means the local market is in sufficient supply of the commodity. The more supply in the market, the lower the basis can get. If the local market has less supply, or even an outright shortage, basis can be positive with the cash over the futures.
Lets say a farmer in Decatur, IL has corn in the bin and looking to sell to the local ethanol plant. It is still April 10th, the futures are still at $4.75, but the local price is $4.85. Decatur, IL has a shortage of corn and the ethanol plants need the corn to meet prior contracted obligations.
- Cash Price in Decatur, IL on April 10th is $4.85
- Futures price for May Corn on 4/10 is $4.75
- Basis = Cash – Futures
- Basis = $4.85 – $4.75
- Basis = +$0.10
The basis for this farmer in Decatur, IL is “10 over May”, which means the local price is 10 cents over the May futures.
Why is this important? Cash prices can have a significant impact on futures prices. If basis across the country is rising, the futures prices may rally. If the basis across the country is declining, the futures price may fall. Some traders track national basis averages, as well as basis in key areas of the country, as they believe the cash price leads the futures prices, which is sometimes the case. If anything, being aware of the basis levels in key areas for the United States gives the trader an insight to the local grain markets around the country.
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