When I say you should look to “win the basis game”, what’s the first thing that comes to mind? For many, I’m guessing the first thought is, “what in the world is the basis game?” You may already be familiar with the concept of grain basis, but thinking of it as a game is something I don’t think nearly enough people do. Most people think of basis as an unfortunate, uncontrollable part of selling your crop. The elevator, or whoever you deliver your bushels to, gets to set the basis, and there’s nothing you can do about it. At least that’s what many producers think, but it’s simply not the case.
Grain Basis: A Game You Play to Win
Now it’s true that your elevator, or whoever you deliver to, is the one responsible for setting the cash price that they’re willing to give you for your crop. If you have multiple delivery points around you, you can, and obviously should be, checking the different basis levels you can get before you make a sale. While that’s a good first step, what happens if none of your delivery points are giving you a basis that you’re willing to accept? I know the situation can sometimes dictate the decision at that point. Sometimes you’re forced to sell regardless of the basis if you have bushels that you don’t have room to store, or you need to generate cash flow. In that case, there’s other options you have at that point to make the most of the situation, and you can read about those options in some of our other blogs.
However, let’s say you have room to store the bushels, or they’re still in the field, cash flow isn’t an issue, and there’s nothing forcing you to sell. That is, except for the fact that the current board price is profitable for you, if only the elevator hadn’t widened out the basis. If that’s the case, the answer is simple: sell the board and continue to hold the physical bushels. When I say ‘sell the board’, what do I mean?
Using Futures and Options to Lock in a Profit
I mean that you go into your trading/hedging account and you sell the futures. This locks in that board price on however many bushels you would like to sell, and it also allows you to hold off on setting the basis. Essentially, you get the board price you’d like, then wait until the basis moves back to where you’d like it to be, and at that point you set the basis and clear out of the futures position. You do have to stay liquid for the margin while you’re holding the futures contract, but the margin on the grains contracts is around only 5% of the total contract value.
Let’s say $4.00 board priced corn is profitable for your operation with average basis. On average, basis is 15 under, but due to a rally in the market, it’s currently at 30 under. With that basis, you’re below your cost of production. You wish there was a way to get the board price AND the average basis so you can lock in a profit. That’s precisely where selling the board comes into play. You sell the $4.00 corn on the board, and continue to hold the physical bushels. When the basis moves back into that average range around 15 cents, you set the basis and offset the futures position. If the board price went down before the basis came back in your favor, then that’s perfectly alright, because you’ve locked in that $4.00 price on the futures and can take the difference in your hedge account and tack it onto your cash sale.
Using Grain Basis in Your Ag Marketing Plan
Now I know that using margin can be intimidating, but when you’re properly margined up front and monitor the position, it can really expand your marketing tool bag, as you can see from the example I outlined. If cash flow and liquidity is stopping you from using margin, then I want to offer up a similar strategy to protect price, but without using margin. Read this short article if you find yourself in that camp. The main takeaway I want you to have after reading this is that you can win the basis game. And now that you know that you can win at basis, don’t you want to? View our Hedging 201 webinar to learn more about how futures and options strategies can help your operation.