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.
Subscribe to Turner’s Take Newsletter & Podcast
Turner’s Take Newsletter & Podcast - Turner’s Take is a complimentary weekly market commentary newsletter that covers the Grain, Livestock and Energy futures spread markets using fundamental, technical and seasonal analysis.
Futures Traders’ Guide to the WASDE
Designed exclusively for futures traders, this comprehensive guide will help you understand the USDA World Agriculture Supply & Demand Estimates For Corn, Soybeans and Wheat reports.
Risk Disclosure
This material is conveyed as a solicitation for entering into a derivatives transaction.
This material has been prepared by a Daniels Trading broker who provides research market commentary and trade recommendations as part of his or her solicitation for accounts and solicitation for trades; however, Daniels Trading does not maintain a research department as defined in CFTC Rule 1.71. Daniels Trading, its principals, brokers and employees may trade in derivatives for their own accounts or for the accounts of others. Due to various factors (such as risk tolerance, margin requirements, trading objectives, short term vs. long term strategies, technical vs. fundamental market analysis, and other factors) such trading may result in the initiation or liquidation of positions that are different from or contrary to the opinions and recommendations contained therein.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts or commodity options can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results.
Trade recommendations and profit/loss calculations may not include commissions and fees. Please consult your broker for details based on your trading arrangement and commission setup.
You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should read the "risk disclosure" webpage accessed at www.DanielsTrading.com at the bottom of the homepage. Daniels Trading is not affiliated with nor does it endorse any third-party trading system, newsletter or other similar service. Daniels Trading does not guarantee or verify any performance claims made by such systems or service.
